Natural Gas Services Group Inc (NGS) 2020 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Second Quarter 2020 Earnings Call. (Operator Instructions) Your call leaders for today's call are Alicia Dada, IR Coordinator; and Steve Taylor, Chairman, President and CEO.

I would now like to turn the call over to Ms. Alicia Dada. Alicia, you may begin.

Thank you, Ross, and good morning, listeners. Please allow me a moment to read the following forward-looking statement prior to commencing our earnings call: except for the historical information contained herein, the statements in this morning's conference call are forward-looking and are made pursuant to the safe harbor provisions, as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, as you may know, involve known and unknown risks and uncertainties, which may cause Natural Gas Services Group actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise, the introduction of competing technologies by other companies and new governmental safety, health or environmental regulations, which could require Natural Gas Services group to make significant capital expenditures. The forward-looking statements included in this conference call are made as of the date of this call, and Natural Gas Services undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to, factors described in our recent press release and also under the caption Risk Factors in the company's annual report on Form 10-K filed with the Securities and Exchange Commission.

Having all that stated, I will turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Yes. Thank you, Alicia, and thank you, Ross. And good morning, everyone, and welcome to Natural Gas Services Group's Second Quarter 2020 Earnings Review. I want to thank all of you all for turning into our call.

In spite of continued weakness in energy demand and volatile energy commodity prices, largely a result of the effects of the COVID-19 pandemic, NGS posted solid financial results in the second quarter. Our ability to react rapidly to reduce our cost structure and respond to our customers' needs resulted in less impact than many in our industry on both our income statement and financial condition. We have been able to address our customers' requests for pricing and shut-in assistance while maintaining a strong financial position.

While our revenues declined in the quarter, we were able to post sequential gains in both gross margin and EBITDA. Importantly, we continue to strengthen our balance sheet and liquidity position, even in this very challenging market environment. NGS delivered free cash flow during the quarter and grew our cash balance to $15.5 million from $13.1 million at the end of the first quarter. Our liquidity position has continued to strengthen into the third quarter as our cash balance at the end of July was approximately $17 million.

While commodity prices have improved from the trough, they remain significantly below levels that will spur significant oilfield activity. While business has improved, the pace has been slow and inconsistent, a trend we expect to continue but gradually improve through the balance of the year. That said, we're seeing new opportunities for which we are uniquely qualified and believe our fabrication capabilities, superior service and strong financial position will allow us to capitalize on those.

As you're aware, we extended the time period to file our second quarter report due to the impact of the COVID-19 pandemic on the Midland community and our firm. We remain vigilant in protecting the health of our team and, as a result, continue to work remotely when possible. We are operating our Midland headquarters with a reduced in-person staff and urge our team members and tech staff to remain safe and healthy. Our field team continues to exercise appropriate distancing and health practices while working with customers on location. While these practices have added incremental costs to our effort, we remain dedicated to protecting the health and welfare of our team and our customers in these unprecedented times.

Before I review the detailed quarterly financial and operating results, I do want to highlight particular aspects of the quarter. Our rental gross margins climbed to 56%, an improvement compared to the year-over-year and sequential quarters with total gross margins gained across the board, too. We reported positive GAAP net income for the quarter. Adjusted EBITDA grew compared to both year-over-year and sequential quarters. NGS delivered positive cash -- positive net cash flow from operating activities of $6.5 million. This represents 38% of total revenue for the quarter. And free cash flow was positive, and we grew our cash balance to $15.5 million, again, maintaining one of the best balance sheets in the industry.

With that, let's move into the details. NGS reported total revenue of $17.4 million for the second quarter of 2020, a 12.5% decrease from the same quarter in 2019. This decline was driven by a drop in sales revenues and service and maintenance revenue. Conversely, NGS experienced an increase in rental revenues of 11.5% when compared to the same quarter of 2019. Sequentially, total revenue decreased by 3%, driven by a decrease in rental revenues of 5.5%. Sales revenue increased sequentially in the quarter and helped offset the modest decline in total revenue. Our customers' capital budgets continue to be constrained, and we expect sales revenues to remain soft in the coming months as companies favor short-term rental commitments over more permanent capital spending. I do, however, expect some recovery in our service and maintenance revenue due to specific activity we see in this segment.

Given the continued challenges in our industry and in the overall economy, we are pleased with our operational performance in the second quarter of 2020. Our rental revenue proved to be resilient in the quarter, declining modestly despite the significant pullback in overall oilfield activity. We generated adjusted EBITDA of $6.5 million, an increase of 13% over the first quarter of 2020, and our operating cash flow for the quarter was $6.5 million.

Total adjusted gross margin, which does not include depreciation, for the 3 months ended June 30, 2020, increased by 1% to $8.8 million from $8.7 million for the same period ended June 30, 2019. Adjusted gross margin as a percentage of revenue for the 3 months ended June 30, 2020, was 51%, an increase from 44% year-over-year. Sequentially, adjusted gross margin for the second quarter of 2020 increased by 8.5% to $8.8 million from $8.1 million from the first quarter of 2020. Adjusted gross margin as a percentage of revenue increased to 51% in this quarter compared to 45% in the prior quarter. These increases in adjusted gross margins are a clear sign that our cost-cutting efforts had a positive effect during this quarter.

Selling, general and administrative expenses in the second quarter of 2020 were $2.7 million, remaining flat when compared to the same period of 2019 and an increase from $2.2 million in the first quarter of 2020. The sequential increase of $500,000 in SG&A was driven by an unrealized gain in the first quarter and an unrealized loss in the second quarter of the mark-to-market value of deferred compensation. This was a noncash variation across the first 2 quarters of the year.

SG&A as a percentage of revenue increased to 15%, slightly above our general run rate of 13% to 14%. This slight increase can be attributed to the aforementioned mark-to-market variations.

Operating income for the second quarter of 2020 was a loss of $148,000 compared to positive income of $302,000 in the second quarter of 2019. The operating loss this quarter was mainly due to lower sales revenue and margins and higher depreciation expense offset by higher rental revenues and lower cost of those revenues when compared to the same quarter of 2019. Sequentially, our operating income improved from a loss of $273,000 last quarter to a loss of $148,000 in the current quarter.

NGS reported net income of $165,000 in the second quarter of 2020. This compares to net income of $327,000 during the second quarter of 2019. Sequentially, net income reported in the first quarter this year was $4.1 million compared to $165,000 this quarter. Net income last quarter, if you recall, was driven by a positive tax benefit of $4.9 million due to net operating loss carrybacks that are now allowed under the government's CARES Act.

NGS reported earnings per diluted share of $0.01 for the second quarter of 2020 compared to $0.02 in last year's comparative quarter and $0.30 in the first quarter of this year.

EBITDA, or earnings before interest, taxes, depreciation and amortization, and our adjusted EBITDA, which also excludes any increases in inventory allowance, improved in both quarters -- comparative quarters. Adjusted EBITDA for the 3 months ended June 30, 2020, was $6.5 million, an increase of 5% from $6.2 million for the same period in 2019. Adjusted EBITDA increased approximately $749,000 or 13% sequentially from $5.8 million in the first quarter of 2020.

Total sales revenues, which includes compressors, flares and product sales, decreased $3.8 million to $2 million on a year-over-year basis. The year-over-year decline is mainly attributable to a decrease in compressor sales and, to a lesser extent, decreases in flares and parts sales. Sequential sales revenue increased to $2 million from $1.5 million primarily due to an increase in compressor sales.

Year-over-year total sales gross margins declined from $1.4 million to $148,000 primarily due to lower sales revenues and margins. The lower margins were largely caused by a higher level of unabsorbed cost due to underutilized compression fabrication facilities caused by the severe contraction in the industry. Second quarter 2020 total sales gross margins were positive at $148,000. This compares to a loss of $298,000 -- $289,000 in the first quarter of 2020.

Second quarter 2020 compressor-only sales of $1.4 million decreased from $4.8 million in the second quarter of 2019. However, compressor-only sales this quarter increased to $1.4 million from $852,000 in the first quarter this year. Compressor-only gross margins were $990,000 in the second quarter of 2019 compared to losses of $127,000 this quarter and $435,000 last quarter. Again, losses on these sales were largely caused by unabsorbed fabrication costs due to the underutilized facilities.

Our sales backlog as of June 30, 2020, was approximately $1.3 million compared to approximately $1.4 million in the first quarter of 2020. We did, however, add another $400,000 to the backlog in August, so we are currently at $1.7 million.

Rental revenue in the second quarter of 2020 was $15.1 million compared to $13.6 million in the first quarter of last year and $16.1 million last quarter. Rental revenue increased 11.5% year-over-year and decreased 6% sequentially. Compared to the first quarter 2020, our average rental rates on a per-unit basis increased a little over 3% and were flat on an average per horsepower basis. Reported rental gross margins this quarter were 56%, an increase from the first quarter 2020 rental gross margin of 51% and an increase from last year's second quarter of 51%.

As of June 30, 2020, we had 2,335 compressor packages in our fleet, down from 2,572 units at June 30, 2019, due to the retirement of 327 units, representing approximately 40,000 horsepower, during the third quarter of 2019. Despite this decrease from retirement of some of our smaller units, the company's total fleet horsepower increased by 8% to almost 447,000 horsepower at June 30, 2020, compared to approximately 414,000 horsepower at June 30, 2019. This reflects the addition of 58 high-horsepower compressors representing 68,500 horsepower to the company's fleet over the past 12 months.

40% of our utilized fleet horsepower now classified as large horsepower equipment. This is one of the advantages of moving into large horsepower offerings. Compared to small and medium horsepower, larger machines tend to fare better in a downturn. This portion of our rental fleet provides a measure of stability when encountering periods of depressed activity, and I think the advantage this quarter is apparent and proven.

Our horsepower utilization in the second quarter of 2020 was 64% compared to 68% in the first quarter of this year and 60% in the second quarter of 2019. Our unit-based utilization of 55% in the second quarter of 2020 compares to 60% last quarter and 53% in the second quarter of 2019.

To demonstrate the volatility we've seen in the second quarter, our churn, which is a dimensionless metric that is calculated by dividing the number of rental units set by the number of rental units returned in a given period, was 0.1 in April, 0.6 in May and 1.9 in June. Any number greater than 1.0 indicates unit growth, so we've seen quite a variation in activity in only 3 months from equipment being shut-in and returned at a torrid pace to a total turn of events a couple of months later. As of the end of June, we have had a bit more than half of the rental units that were shut-in return to service, and we anticipate the balance coming back online over the course of this year.

This downdraft, I'm not sure I'd call it a downturn due to the ferocity and speed of it, was untypical of what we normally experience when moving into times of depressed activity. Usually, rolling discounts is the name of the game. Crude drops over time, various discounts are negotiated over many months, and there's generally time to adjust to a declining market. There was no time to adjust with this one. Price discounts were the norm of the first week, and then we quickly moved into a phase of managing total shut-ins, which usually have no revenue associated with them, and that's the big difference. Instead of the usual rent reductions, some revenue just vaporized overnight. As mentioned, the trough looks like it's behind us, and we are seeing shut-ins lifted, but we think it will take the balance of the year to get back close to what we lost.

The speed at which the business drafted down and then backup demonstrates the resilience of our field organization and their ability to quickly adjust to unanticipated conditions. Although there's not much good to talk about or imagine through an unprecedented decline, I think we have come through this in much better stead with our customers. Our ability to be financially flexible and accommodate the majority of requests for discounts and shut-ins has enabled us to move into a preferred position, and I think we'll pick up additional future business from it.

For the first half of this year, we have spent a total of $11 million on capital expenditures, with $9.5 million of that through rental equipment. Going forward, we anticipate another $8 million to $10 million of capital expenditures for the balance of the year. This is a couple of million dollars more than what we projected in our fourth quarter 2019 call, but we have a pretty good line of sight to approximately $6 million in capital expenditures that we anticipate in the near future. These funds will be rental fleet additions for popular-sized compressors that we're presently sold out of, along with a nominal sale leaseback program with one of our customers. All of this capital would be deployed on long-term contracts at above-market rates.

From a balance sheet perspective, our total bank debt remains minimal at just over $400,000 as of June 30, 2020, and our cash balance is strong at $15.5 million. This balance is up from $13.1 million at the end of last quarter and has since grown to approximately $17 million at the end of July. In addition, we have a largely untapped credit line of $30 million available to us, which provides ample liquidity in nearly any conceivable scenario. And none of this includes the previously mentioned and anticipated $15 million cash tax refund that we have applied for.

We generated positive net cash flow from operating activities in this quarter of $6.5 million, which represents 38% of our quarterly revenue. Free cash flow for this current quarter was $2.4 million.

In summary, there are not many companies in the oilfield services space that have a recurring rental revenue stream, essentially no debt on the balance sheet, cash reserves in the bank and a continuing ability to generate cash.

Before I take questions, I want to thank the entire NGS team for their dedication and efforts during this difficult period. In an environment where we not only have to consider health concerns and effects but also continue around-the-clock service to our customers, our employees have demonstrated the utmost in professionalism and dedication. They are to be commended.

While the balance of 2020 will remain challenging, we do not believe it can be worse than what we experienced in the first half of the year, and there are some modestly encouraging signs on the horizon. More importantly, NGS is well positioned with a solid balance sheet, a strong customer base and a team committed to providing uncompromised service. With a stable to modestly improving operating environment, we believe there will be opportunities in the balance of the year and even more as we turn the page into 2020 (sic) [2021].

Ross, that's the end of my prepared remarks. So if you would, please open the phone line for questions.

(Operator Instructions) Our first question comes from Rob Brown from Lake Street Capital.

Nice job in a tough environment. Just want to get a little further color on the CapEx you're projecting for the rest of the year, and really, that sounds like a new contract. And maybe what area is that contract covering? Is it the high-horsepower business, again? And maybe just some color on what that business is?

Well, just like about everything else in the world, it's centered around the Permian. So the majority of that $6 million we're looking at is Permian based. And probably half of it is -- well, 50%, 60% is what we classify as large horsepower and the balance being medium horsepower gas lift units that we're essentially out of but that are required also. So it's a smattering, but it still continues along the Permian route and then the large horsepower route.

Yes. Okay. And then maybe just digging in a little bit into the gas versus the oil market. Are you seeing any recovery -- or where are you seeing kind of the spotty recovery? Is it basin driven or resource driven? Or maybe some color on how the recovery is taking place?

Yes. It's -- the Permian is providing probably the majority of it, but we have seen more activity in some of the SCOOP/STACK stuff, Texas Panhandle, along there. So it's a little spread. And actually, we're seeing a little more of the Rockies somewhat. So the resurgence in activity we've seen has -- is not just concentrated in the Permian from the point of all the CapEx we just talked about, but a smattering in 2 or 3 geographies, so Permian, Mid-Continent and the Rockies would probably be the primary ones that we're seeing most of the regrowth from.

Okay. And then last question is on the tax refund. I think you said a $15 million tax refund. You've applied it before. Do you expect that this year? And what's the status of that?

I've been chastised about trying to put a timeline on the tax re from the U.S. government in these times. So I'll diplomatically say that we hope for it this year but there are no guarantees. We think it should be, but there are no guarantees to it. Of course, they won't -- IRS didn't give you any help as far as timing and stuff. And obviously, they're busy printing checks for other things, but we're hoping for this year, but there's no guarantee on that.

(Operator Instructions) And Steve, at the time there appears to be no further questions.

Okay, Ross. I appreciate it. Thank you, everybody, for joining on this call. I think we had a good quarter, but we appreciate your time this morning and look forward to visiting with you again next quarter. Thanks.

This concludes today's conference call. Thank you for attending.