Q3 2025 Natural Gas Services Group Inc Earnings Call

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Speaker #2: Good morning, ladies and gentlemen, and welcome to the NATURAL GAS SERVICES GROUP INC Q3 earnings call. At this time, all participants who are listening only mode.

Speaker #2: Operator assistance is available at any time during this conference by pressing zero pound. I would now like to turn the call over to Miss Anna Delgado.

Speaker #2: Please begin.

Speaker #3: 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.

Speaker #3: Investors are cautioned that forward-looking statements are not guarantees of future performance. And that actual results are developments made different materially from those projected and forward-looking statements.

Speaker #3: 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.

Speaker #3: 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 filings with the SEC, including our form 10Q for the period ended September 30th, 2025, and our form 8Ks.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: I will now turn the call over to Justin Jacobs, Chief Executive Officer. Justin.

Speaker #4: Thank you, Anna. And good morning, everyone. Thank you for joining our Q3 earnings call. Joining me today is Ian Eckert, our Chief Financial Officer.

Speaker #4: NGS delivered record results again in the third quarter, extending our momentum and reinforcing the value we provide our customers through high unit runtime and great service.

Speaker #4: These results were achieved through the dedication of our people, and I want to start by thanking the entire NGS team. Once again, I want to pay special thanks to our exceptional field service technicians, who are the backbone of NGS.

Speaker #4: Ultimately, they are the reason that customers, both existing and new, are increasingly looking to NATURAL GAS SERVICES to provide their compression needs. Starting with third quarter performance, we delivered a record quarter across several key metrics, including total rented horsepower, horsepower utilization, adjusted EBITDA, and earnings per share.

Speaker #4: This performance was driven by strong field service execution and excellent technology-enabled uptime. We continue to take market share in large horsepower compression, reflected by the 27,000 horsepower increase in the quarter.

Speaker #4: All new sets were large horsepower under long-term contract and roughly half were large horsepower electric units. I'd also like to call out the disclosure in our 10Q regarding Devon Energy.

Speaker #4: Which now represents more than 10% of year-to-date revenue. Devon is a longtime customer that we have had significant amount of horsepower sets over the past year.

Speaker #4: We are proud to partner with them and look forward to delivering on their needs for years to come. We delivered third quarter adjusted EBITDA of 20.8 million, up approximately 15% year over year and 6% sequentially.

Speaker #4: results allow us to raise full year These 2025 adjusted EBITDA guidance to 78 to 81 million from the prior 76 to 80 million range.

Speaker #4: Additionally, we paid out NGS's inaugural quarterly dividend of $0.10 per share. This is another important step in enhancing shareholder returns. Our compelling performance, durable operating cash flows, and confidence in the 2026 outlook make it possible to increase our fourth quarter dividend by 10% to $0.11 per share, or an annualized $0.44 per share.

Speaker #4: While investors should not expect a dividend increase every quarter, the board wanted to communicate its clear understanding of the importance of a continuous and growing dividend.

Speaker #4: These shareholder distributions do not preclude continued high levels of growth. NGS maintains the best leverage position among its public peers, giving us the flexibility to fund both growth and shareholder returns.

Speaker #4: Our competitive position continues to improve through technology leadership and service excellence. As we discussed on previous calls, when comparing to year-end 2024 horsepower, we expected to add approximately 90,000 horsepower over the course of 2025 and early 2026.

Speaker #4: The significant addition of new electric and gas units in the third quarter keeps us on track for that number. Looking at 2026, we already have a significant number of new large horsepower units under contract.

Speaker #4: This is a mix of both gas and electric units. Additionally, our opportunity pipeline remains quite active for 2026 sets, driven by both existing and new customers.

Speaker #4: This indicates strong continued demand for compression. While it is still early, based on visibility we have today, we would provide an initial expectation for 2026 growth CapEx of 50 to 70 million.

Speaker #4: I'll provide more color in the guidance section of this call. Turning to the broader market, we have delivered strong and sustainable results through September year-to-date, despite persistent volatility and global macroeconomic uncertainty.

Speaker #4: Regardless of whether these conditions persist, we remain confident in our ability to deliver improved performance because our business is tied to existing production where demand for compression continues to grow.

Speaker #4: Our customers in oil production currently have a heavy focus on production efficiency, reliability, and emissions performance. These are all areas where NGS's advantage. Furthermore, rising electricity demand and LNG infrastructure buildout create durable compression-intensive growth opportunities.

Speaker #4: AI and data center expansion, both domestically and internationally, further drive NATURAL GAS production and compression needs. Overall, we are optimistic. Compression is essential to delivering production throughput, and our fleet, technology, and service position at NGS to deliver value to both customers and shareholders.

Speaker #4: I'll move next to our growth and value drivers. First, fleet optimization. We continue to optimize our fleet assets as reflected in continued improvement in rental revenue per horsepower performance.

Speaker #4: We finished the quarter at 27 dollars and 8 cents per horsepower per month, a 1.7% sequential increase driven by new unit sets and price capture through contract renewals.

Speaker #4: Beyond price and mix, the next leg of optimization comes from data. We are more deeply integrating operational performance from our units and broader operations directly into our enterprise systems so that commercial and operational decisions are made faster and with more precision.

Speaker #4: Customers increasingly recognize this as a differentiator. The ability to drive uptime and gas flow through data analytics has become a real competitive advantage for NGS.

Speaker #4: These investments have tangible payoffs: lower maintenance costs per unit hour, higher customer retention, and improved fleet performance. On asset utilization, we have consistently improved working capital efficiency and continue to pursue targeted optimization initiatives.

Speaker #4: The income tax receivable has been improved by the Joint Committee on Taxation, and we are awaiting payment processing once the federal government shutdown ends.

Speaker #4: Prior to the beginning of the shutdown, my expectation was that we were going to announce receipt of this receivable on this call. Regarding real estate monetization, we will provide greater transparency on these efforts in the coming quarters.

Speaker #4: As I've said before, we are not real estate investors. Our goal is to convert non-productive assets into productive horsepower in the field. These non-cash asset monetization efforts provide additional capital to support fleet expansion, as reflected in this quarter's additions and our commitment to add significantly more horsepower.

Speaker #4: Momentum is building with both existing and prospective customers. As I now repeat on these calls, we are clearly taking market share organically. One simple way to quantify this is to look at our growth capital to EBITDA ratio.

Speaker #4: For NGS, our growth CapEx is for new units under long-term contracts. When you compare our growth CapEx to EBITDA, we were materially higher than each of our publicly traded competitors in 2023, 2024, and now again in 2025.

Speaker #4: I'm highly confident this trend will continue in 2026. I believe our market share gains are driven by our service, our unit technology, and our lower leverage.

Speaker #4: With that, I'll turn the call over to Ian to review detailed financial and operating results before returning for closing comments on Q3 2025.

Speaker #2: Thank you, Justin. And good morning to those joining us. As Justin emphasized, we delivered a very strong quarter reflecting significant new fleet additions that position NGS well to continue delivering shareholder value.

Speaker #2: To recap the third quarter, total rental revenue grew 11.1% year over year, and 4.9% sequentially to 41.5 million dollars. This growth reflects the 27,000 rented horsepower increase during the quarter.

Speaker #2: Rental adjusted gross margin was 25.5 million dollars, up 2.6 million dollars year over year, and 1.5 million dollars sequentially. The rental adjusted gross margin percentage was 61.5%, an improvement of 19 basis points year over year, and 75 basis points sequentially.

Speaker #2: Reflecting sustained pricing discipline, large horsepower fleet additions, and lower maintenance parts consumption, adjusted EBITDA for the quarter was 20.8 million dollars, up 2.7 million dollars year over year, and 1.2 million dollars sequentially.

Speaker #2: Net income was $5.8 million, or 46 cents per diluted share, up $800,000 year over year and $600,000 sequentially. Rented horsepower ended the quarter at approximately 526,000, compared to 475,000 a year ago and 499,000 in the second quarter of 2025.

Speaker #2: That's an 11% increase year over year, and 5% sequentially. Fleet utilization reached a record 84.1%, up 204 basis points year over year, and 45 basis points sequentially, with essentially all large horsepower equipment fully utilized.

Speaker #2: Operating cash flow for the quarter was 16.8 million dollars, supported by continued improvement in accounts receivable, with quarter-end end DSO of 28 days. Capital expenditures totaled 41.9 million dollars, including 39.1 million dollars of growth CapEx, and 2.8 million dollars maintenance.

Speaker #2: Sequentially, growth CapEx increased 17 million dollars as fabrication ramped up to deliver new unit sets. We ended the quarter with 208 million dollars outstanding on our upsized revolver, and 163 million dollars in available liquidity.

Speaker #2: Our leverage ratio was 2.5 times, up modestly from 2.31 times in the second quarter, and remains the lowest among our public compression peers by a significant margin.

Speaker #2: Regarding capital returns, our approach remains disciplined and balanced. Focused on delivering a growing dividend over time, while investors should not expect dividend increases every quarter, the decision to raise the fourth-quarter dividend by 10% to $0.11 per share underscores confidence in the durability of our operating cash flow.

Speaker #2: Speaking of outlook, I'll now hand it back to Justin to discuss

Speaker #2: guidance. Thank

Speaker #1: You, Ian. Looking ahead, based on our year-to-date performance and a strong second-half deployment schedule, we are raising full-year 2025 adjusted EBITDA guidance to $78 to $81 million.

Speaker #1: This is a 2% increase at the midpoint from our previous guidance. We expect 2025 growth CapEx of 95 to 110 million, a modest tightening of the range due to improved visibility on payment timing with no impact on total horsepower additions.

Speaker #1: Looking beyond this year, our preliminary expectation is that 2026 growth CapEx will be 50 to 70 million. While it is still early, we wanted to communicate to our investors that 2026 will be another year of organic growth for NGS.

Speaker #1: I have a very high degree of confidence in the low end of that range. How far we go in or above that range will be determined as much by timing as customer needs.

Speaker #1: As I noted earlier on the call, new unit quote activity for 2026 remains significant for both existing and new customers. I would also comment that regardless of where we are in the range, we expect a materially outpace our publicly traded competitors when comparing growth CapEx to EBITDA.

Speaker #1: Further, we are starting to see 2027 RFPs and the amount of horsepower indicates continued growth into the future. Our 2025 maintenance CapEx remains 11 to 14 million, and our ROIC target is unchanged.

Speaker #1: closing, we delivered multiple company records In in the third quarter. This momentum reflects technology and service-enabled share gains, with our customers along with operational and capital efficiency.

I think it's a mix of both. Uh, I have been um, you know, obviously we had the, uh, disclosure, as we mentioned earlier is in the queue of, of a new 10% customer. Uh, we've been setting a lot of equipment with Devin have been, you know, very very pleased with that relationship and look forward to uh performing on even larger amounts horsepower with them going forward. Uh, as I look at, you know, 2026 and and then even beyond that, uh, I think we have an expectation. We're going to continue to grow, uh, with our existing customers. And we're certainly seeing opportunities with some new customers that could be potentially quite large. But, you know, still early there. We have to go out and uh, get some of those wins.

Okay, thank you. Congrats on all the progress. Great, thanks, Rob.

Thank you very much. And again, if you have any questions please, uh, press 7 pound and we will open up your line. Our next question comes from. Nate Pendleton with the Texas Capitol. Go ahead please.

Morning. Congrats on the strong quarter. Can you talk about your decision to...

of course, can you talk about your decision to increase the dividend here? Given the strong Outlook your messaging for future growth potential, and maybe how you balance that increasing return of capital goal with the growth opportunities ahead of you.

Of, uh, showing that uh, we're going to be increasing dividend and and return of capital to shareholders, uh, while still growing the business at a, uh, materially higher rate than our public competitors.

Got it, thanks for the context and then maybe going back to to Devin specifically, how was NGS able to make inroads there? And how did that relationship? Develop?

It's been a, uh, a long time, uh, relationship. If you go back, um, I'm not sure how many years, but quite a few years ago, uh, they were disclosed as a customer, so they've been a long-time customer. I think it was a great example for us of, uh, what some of the technology, um,

Our units that are proprietary to us led to a significant, um, expansion of a relationship with an existing customer and as they understood some of the capabilities, uh, of our units, uh, and some of the data that that they would be able to get off of that. Uh, that was the primary driver, uh, on top of uh, a reputation from a service perspective to deliver their needs and what is a mission critical, you know, service for them. And so it really, it boiled down to the, you know, 2, simple things, or maybe 3 simple things of, you know, long time, existing customer, uh, uh, gets a an understanding of some, of the current capabilities we have, uh, and the runtime that we've delivered for customers, including for Devon, uh, that allowed the significant expansion of the

That relationship.

Alright, thanks, that's it for me. Congrats again. Thanks Nate.

Thank you very much. And again, if you have any questions, please press 7, pound our last question. So far comes from gin Alison Raymond James. Go ahead, please.

Hey, good morning guys. And again, congrats on a on another solid quarter. Um, Justin just kind of following up on that to mention how Devon expanded from a, the a customer into their, maybe just a little bit of color on new customer opportunities is, you know, is word kind of spreading about what your technology and service quality is doing for oxy and Devon to drive new potential customers to the door or how are you, you know. Setting up to get new customers. I'm curious.

You know, I think it's a, it's an ongoing effort. I think, uh, I, I believe that we are, uh, seeing success there. Um, you know, in terms of public quantification Devon is is, uh, you know, that's something we're able to point to, uh, in terms of conversations with both existing customers that maybe are a much smaller customers where we have, you know, it's just a smaller customer. It is really, um, having multiple conversations and then doing demonstrations and showing in the field of of this is how the technology works. These are the benefits that our customers get out of that, uh, and really getting into

Uh, you know, the operational engineering teams at, uh, at these customers, um, both existing and then looking to do it with new customers as well. And that that's certainly a process. But I'm encouraged by, uh, the reaction that, uh, we get from these customers when they really start to see the benefits that they will get out of our service performance perspective, and data perspective. And so, I think it's it's ongoing and there are a couple of positive indicators, but something we have to keep working at

For sure, appreciate that and and maybe just back up on the capex. If I go back 2023, you guys had a very heavy capex year delivered. A lot of new units and you kind of took 24 to maybe absorb some of that, get it all you know, make sure operations are running the way you wanted to and then you lean back in this year. And so I guess as I think about the 50 to 70 kind of starting point for capex, do we think about 26 maybe as kind of a a 24 type of year and then things continued to build for for 27, potentially ramping back up, if if the macro is still kind of cooperates. Is that a good way to think about it? I think generally uh, you know, we looked at 2026 and say, you know, it's in in uh, looks like it'll be generally in line with 2024. I mean, you know, as you as you go back to 2023, it's a bit of an outlier here in terms of the numbers quite a huge number. Uh, but but 2025, you know, you're looking midpoint kind of the low hundreds. Uh, some of that is driven by, uh,

And so we're encouraged. As we look forward that, uh, we're going to continue to grow at a significant rate organically. And, uh, as I kind of look at the market broadly, uh, you know, see that we're capturing market share.

Awesome. I look forward to that growth.

Thank you very much, Jim, appreciate it.

Thank you very much and uh with that uh we have no other questions.

Excellent. Well, thank you, Luke. Thank you to everyone, to for, uh, for joining the call this morning. Uh, we appreciate the time, the interest, uh, and, uh, we look forward to continuing to, uh, report strong results for our investors. And so, we will see you again on the, uh, on the next quarter's call. Thank you for your time.

Thank you, everyone, and this concludes today's conference call. Thank you for attending.