Natural Gas Services Group Inc (NGS) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Natural Gas Services conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question and answer session.

Your call leaders for today's call are Jim Drewitz, Creative Options Investor and Public Relations, Wayne Vinson President and CEO, Wallace Sparkman, President and NGE Leasing, Inc.

Scott Sparkman, Controller, Earl Wait, Chief Financial Officer.

I would now like to turn the call over to Mr. Jim Drewitz.

Mr. Drewitz, you may begin.

Thank you very much, Erica.

Good afternoon, ladies and gentlemen.

It's my privilege to read the forward-looking statements so bear with me while I do this.

Except for historical information contained herein the statements in this conference call are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties which may cause NGS's actual results in future periods to differ materially from forecasted results.

Those results include among other things, the loss of market share through competition or otherwise, the introduction of competing technologies by other companies, a prolonged substantial reduction in oil and gas prices which could cause a decline in the demand for NGS products and services, a new governmental safety, health, environmental regulations which could require NGS to make significant capital expenditures.

The forward-looking statement included in this conference call are only made as of this date of this call and NGS undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

A discussion of these factors is included in the company's annual report on Form 10-KSB filed with the Securities and Exchange Commission.

With that, let me turn it over to Wayne Vinson.

And Wayne, start with the call.

Thank you, Jim.

Good afternoon and thank you for joining us in today's conference call.

Again, before we get going I'd like to introduce Jim Dreywitz with Creative Options, our new investor and public relations firm.

Jim and his group are located in the Dallas area and come to us highly recommended.

He has already brought value to the company and we welcome him to our team.

We encourage you to use him as a resource for information about the company.

Hopefully you've all had the opportunity to review this morning's news release in our second quarter and six-month financial results.

I'm not going to review all the numbers, but I will touch on the highlights so we can leave time for questions and answers.

Our total revenue for the second quarter increased 33% to $3.2 million as compared to $2.4 million for the same period last year.

Totals revenue for the six months increased 9% to $5.6 million as compared to $5.1 million for the same period last year.

Sales of equipment, parts and rebuilds decreased 2% for the second quarter compared to the same period of 2002, which decreased 35% compared to the same six-month period last year.

Our gross margin for the six months ending June 30th, 2003 was 55% compared to 45% for the same period in 2002.

This was largely a result of our strong growth within our high margin leasing business.

Our core leasing business continued to grow and expand during the quarter and year-to-date.

Leasing revenue increased 67% from the second quarter and 54% for the six months ending June 30th, 2003 as compared with that same period last year.

This increase is the result of units added to our rental fleet.

From June 30th, 2002 to June 30th, 2003 the company has added 137 new gas compressor units to our rental fleet, which includes the 28 units purchased from a joint venture partner.

This brings our total rental fleet to 352 units as of June 30th, 2003.

Our utilization rate has improved during the second quarter to approximately 91% as of today.

As we stated before, the primary element of our overall growth strategy is to aggressively expand our leasing business.

As leasing income represents a larger and larger portion of our overall revenue stream, we believe the fluctuations in our sales results will have a less significant impact on the overall revenue trends.

It's worth noting that the impact of weak spending by our customers on capital equipment can actually benefit our leasing business as customers turn to less expensive options to meet their compression needs.

While leasing is the primary focus of our long-term expansion strategy, equipment sales are also important, and we believe they will continue to rebound as economic conditions improve.

We will actively search out acquisition prospects that will complement our goal to be a natural gas service provider.

Before we go into our questions, I'd like to highlight some of the real interesting facts and events that have happened during the first six months of 2003.

At June 30th we had cash and cash equivalents of $976,000 and working capital of $992,000.

We had net cash flow provided by operating activities during the six months of $536,000.

We have leased a facility in Farmington, New Mexico and established our own service organization instead of using a contract service company.

We can provide better maintenance and repair on our leased equipment by having our own personnel, service shop and equipment.

We currently have 143 leased units in this area.

We have also leased a facility in north Texas near Fort Worth to accommodate our growing service operations.

We already have our own service trucks and employees located there now.

We now have a shop for service and repairs.

We currently have 85 leased units in that area, and the number is growing rapidly.

Both of these facilities will improve the maintenance of our rental units and provide more financial stability in maintenance cost.

Both areas are experiencing growth and a need for more compressor units.

The utilization rate of our rental units continues to improve.

It now stands at 91%, which is well above the industry standard and is continuing to improve.

The rental of our new two-stage screw compressor packages also continues to grow.

Our customer that leased the initial four units have now signed a lease for an additional two units and is evaluating the need for an additional two after that.

Operations in Michigan continue to exceed expectations.

We recently leased three-420 horsepower units in Michigan under a five-year lease agreement.

Two of those units were assembled in Michigan and one was transferred from our Farmington operation.

We currently have 94 leased compressor units in the Michigan division.

We have strengthened our sales force by adding one salesman and will soon add a sales and marketing manager to add further strength to our company.

Income from leased equipment today exceeds $600,000 per month and is growing.

The number of units in our rental fleet now stands at 359 and is also growing on a daily basis.

A major customer has had a need for medium to low horsepower units with discharge pressures up to 1200 pounds.

We developed the unit and the customer signed leases on three of the four units that we are building right now with indications they will need an additional two per month.

The first unit will be installed and commence compressing gas next week.

Our stock price started the year at $3.75 and closed yesterday at $6.60.

We're doing a better job.

With that I would like to open it up to any questions either for myself or Wallace Sparkman.

Ladies and gentlemen, at this time we will conduct a question and answer session.

If you would like to state a question, please press 1 on your phone now and you'll be placed into the queue in order received.

If at any time your question has been answered, please press pound to remove yourself.

We are ready to begin.

Our first question comes from Zane Gurley with Nightenger, Tucker and Bruner.

Please state your question.

Whoever wants to answer this, Wayne.

I see by your release what your performance was on the top line, the net income line and the EBITDA line.

I'm just curious, cash flow to me is as far as the operating measure of the company is probably the most important, and it was up much stronger than net income or EBITDA, but it's not mentioned in the release.

Could you comment on the cash flow, just what it was and just in general?

Zane, this is Wallace.

I'll field that.

And Earl is here, he might add to it a little bit.

But the cash flow, we try to follow the guidelines of the SEC, and our net cash flow provided by operating activities during the six months was approximately $536,000.

And that is net operating cash flow.

I think the calculation you may use shows a much higher number than that, but that's the net operating cash flow.

So, you don't include the amortization and depreciation in your cash flow numbers?

Do you want to answer, Earl?

Well, yes.

What we've tried to report, Zane is, you know, what are the GAAP standards.

And so, that's why we report the net operating results provided by operations, which you'll find in our cash flow statement.

Okay.

I guess I'm just confused after all these years.

You'll have to talk to me sometime and re-educate me on what to look at.

Get a copy of our 10-Q.

That will help you to understand it a little bit, Zane.

Okay.

Another question?

Our next question comes from Joe Bainey from Ellis G.I. Advisor.

Please state your question.

Great quarter, guys.

The question I have is I noticed your rental fleet grew 38% on a unit basis year-over-year, but your leasing revenues grew 67%.

How did we grow the revenues 67% when the fleet was only growing 38%?

Did we have better rates or better utilization or both?

How does that put together?

Basically most of it is accounted for by the bigger horsepower units.

They bring a lot higher rental rate and their maintenance and operating cost is not that great.

So, as our fleet gets bigger horsepower, those margins will tend to increase.

I think Wayne mentioned that we had added four-two screw compressors to our rental fleet.

Those are now in service.

They've been put in service, you know, during the first half of this year.

And they have ordered two more of those.

So, that will make the rental income up and doesn't change the operating cost that dramatically.

It also, this is Wayne Vinson.

When you're looking at the number of units, obviously your rental income from one big one is quite a bit more than others.

So, we may not have the number of units, but from a horsepower standpoint we're growing in a more dramatic fashion.

Okay.

When we go forward and we're adding the units, you said, monthly or weekly, are we going to be adding more of these bigger horsepower units or smaller, a mix or can you tell?

We're building two more for this same customer right now.

The first one will be delivered somewhere around the end of the month, and the next one will probably be toward the end of next month.

And so, those are ready to go out.

We're still getting additional requests, we think, for more of those units.

So, yes, we will be adding them.

Okay.

Excellent, excellent.

I saw your utilization rate I think was up to 91%.

Do you have enough inventory?

I mean, when people walk in the door and want a compressor, is there a wait time there involved with regard to getting them equipment?

Well, this is Wayne Vinson.

It depends on what they're wanting.

We try to keep some inventory here.

Obviously we won't have everything everybody needs.

What we try to do is keep our utilization rate between 85 and 90%.

When we start seeing ourselves go above 90, we feel like we're a little short on inventory, below 85 we're a little long on inventory.

So, today I would say we're a little bit short, but catching up.

Okay.

When he said inventory here, we also maintain inventory at Farmington, New Mexico at our facility there, and at Bridgeport, Texas, which is near Fort Worth in the Fort Worth [INAUDIBLE].

And as well as in our Michigan office.

Oh yeah, that's right, you have Michigan.

All right.

We're in Midland, Texas.

So, we have four inventory areas.

On these bigger horsepower compressors, do you have a typical lease term there?

I remember the initial press release I think was a one-year term or two-year term, or do you have month to month?

No, it's a two-year term, and month to month thereafter.

But I might say, where the compressors are going up in Farmington, New Mexico the operator of the wells is putting a building around the compressor that cost approximately $75,000.

And there's no way to get the compressor out without taking the building down.

So, we consider that we have a lifetime of the well lease.

Okay.

You have a captive market, it sounds like, on those.

I've got a general question for you.

I know on shore gas wells have increased depletion rate.

I think it's 30% per year for now, which is substantially above what it was a decade or two ago.

Are the increased depletion rates, does that impact your business at all with regard to supplying compressors?

Yes, it does.

As the depletion rates go down and the prices stabilize where they are today in the $4 to $6 range, it becomes very attractive for the oil producer or gas procedure to put on compression to get more ultimate reserves.

So, we're trying to get more out of the older wells, and when you do that, it takes more gas compression to do it.

Okay.

That makes sense.

And I guess the last question I have is with regard to coal bed methane, that seems to be a real hot area especially up in Utah and up in some parts of Canada development.

Have you developed any compressors or have any customers looking at coal bed methane compression projects?

Yes, we do.

Approximately half of our compression in the Farmington, New Mexico area compresses coal bed methane.

Our original compressor designs were developed towards the coal bed methane fields, so we're very active in that area.

We don't participate in the two areas you mentioned right now, but we do have compression out running in coal bed methane.

And I understand coal bed methane it's one of those, those are fields that don't produce a lot but they produce literally for 50 years or 40 years.

So, those probably would be long-term -- potentially long-term unit leases.

Would that be a good assumption or not?

Well, they're long-term unit stays.

The leases don't get any longer, but the time that you stay stretches out.

A lot of those wells will have reservoir lives of 30 to 70 years.

Exactly.

So, when you get a compressor out there, even though it's only a month to month lease, for example, they are not going to change out a compressor generally just to get a cheaper rental rate, will they?

Generally that's true that they won't.

One of the things, we try to become I guess a solid partner with the oil and gas producer.

And one of the things we do, if the conditions change on a well or in a location, we'll work with that producer and provide either larger compressors or smaller compressors as the need exists.

So, we try to put ourselves in the shoes of our customer and work with them.

The other thing, you talk about the compressor staying out there.

It's not inexpensive to change out these compressors.

So, even if somebody comes in and maybe beats your rental rates, you know, as long as it's not substantial, it doesn't make good sense to truck them back and replumb them and all those things, it can be a very expensive process.

Yeah, that's what I figured.

Well, great revenue, great growth, great quarter.

I appreciate the answers.

Thank you, sir.

Our next question comes from Michael James with Nightenger, Tucker and Bruner.

Please state your question.

My question is, the gross margin on the service business went up substantially from Q1 to Q2.

I was wondering if you could comment on that, and then also if you could comment on the breakdown between the sales regarding flare stacks and compressors?

Thank you.

Okay.

The service margin, because we've done a lot of overhaul work in our Michigan facility for third party services, typically in that area, and that's where a lot of our service work comes from, is inclement weather.

You can't get much of it done in the wintertime.

So, we will typically see an increase in service in the warmer months.

That's the area that we do most of our service work for, for third parties.

The breakdown between compressors and flares, Michael, I don't have sitting in front of me.

But I'll be glad to furnish that to you.

Could you comment on the -- I guess the demand that you're seeing regarding possible sales and leasing going forward being that the price of natural gas has come down a fair amount in the last month?

Well, and when we talk about the price of natural gas coming down, I know it has come down as far as the market goes, but most of your producers have to have compression regardless.

If they want to put gas in the pipeline, they have to have compression.

So, although it does affect our market somewhat, it's not a dramatic effect.

I would say if we got down below $2, we might want to start looking a little bit.

But down to $2, I would say that 95% of the compression we have out today is very economical at $2.

And they have to have it to get in the pipeline.

What we are starting to see a little bit of is some upswing in our trend for sales.

The economic conditions of the industry have exchanged somewhat.

We're starting to see some companies rather than paying down debt doing some capital spending.

It hasn't been dramatic, it's actually affected our leasing business more than our sales business where we've seen them installing new compression that they might not have otherwise just because they have a little bit of budget out there.

Okay.

Thank you.

Our next question comes from Zane Gurley from Nightenger, Tucker and Bruner.

I had one follow-up question.

I'm trying to find the comment in your IPO prospectus about accessing new capital.

You're down around $900,000 in cash and your lease business is growing very rapidly.

Just comment in general how you see your ability to access the necessary capital to keep this rolling outside of, you know, internal cash flow.

Okay, Zane.

We have been looking at various alternatives, realizing that toward the end of the year we will need additional capital if we continue building our rental fleet at eight to 12 units per month.

And so, we have various opportunities out there.

It appears it's not going to be a big struggle to get the capital needed.

As you know, we're retiring our bank debt over 60 months, which helps.

And our bank has shown a big interest in putting together the money that we need to continue at the pace of our growth.

So, that discussion is pretty far along, and it appears that's the way we'll go at this point.

Thanks.

Okay.

Good quarter.

Thank you, Zane.

Our next question comes from Ed Irvin from [Wyco] Securities.

Hi, guys.

Good quarter.

Thanks.

I just would like to get a feel of what you think the industry, the outlook from now and the last six months of the year and if you could sort of explain how good a returns a customer can get by using a compressor and whether you think that the demand will be picking up from here or not?

In other words, is it economical for somebody to use these compressors?

Ed, let me just give you an example, one that we just installed for our customer in the Midland area here.

And this is a very small well, hardly economic.

But he was producing 145 Mcf per day along with oil.

We put a compressor on, and with that compressor his sale of gas went to 190 Mcf.

That's only a 45 Mcf per day, but the net effect is that that compressor, he can lease or does lease from us for $1500 a month, and this increased his income by about $6,000 per month.

So, even those small amounts, it's economic.

The bigger gas wells, I guess, that has bigger volumes would be more dramatic than that.

For instance, where we put one of the two-stage units up in Farmington, New Mexico, the production doubled.

The wells were producing about 500 Mcf a day, and with the compressor it went to about a million.

And so, I think with that increase he's paying the rental on that compressor in about two and a half days of run time.

That's an awfully good type of return.

So, it's a win-win for everybody.

The customer wins and you win by putting the compressor out on a lease.

Yes, sir, and it's helping their financial results.

I just saw their news release today, and it is definitely helping them.

Now, you see an increase in demand.

Where I'm coming from now, we know the return looks good out there, but I know that the drilling is not going up as fast as everybody thought it was.

I was wondering if the compressor market is growing as fast as everybody thinks it is?

Right now we're being strained to meet the demand that we have from our customers.

We're currently just made the decision to have some units packaged in our Michigan facility, and that will complement the production that we have in Midland, Texas.

So, the demand is out there.

The lack of drilling or the drilling slows down of new wells, that makes the producer want to get more gas out of his old wells.

So, typically we'll get calls when that happens, Ed.

Well, good luck and thanks a lot.

Okay.

Our next question comes from Mandy McNamara from Cohen Specialists.

Hi, guys.

I just didn't get the name of the IR firm, so I was hoping.

And great quarter, too.

Congratulations.

Okay.

The name of the IR firm is Creative Options.

It's Jim Drewitz.

Fabulous.

Thank you very much.

Good quarter, guys.

Thank you.

Once again, ladies and gentlemen, if you would like to state a question, please press 1 on your phone now.

Mr. Drewitz, at this time we have no more questions.

Well, if we're done, are there any other questions out there, gentlemen, that you would like to ask, ladies and gentlemen, because if not, then we're going to turn this conference call over to Wallace for final comment.

If not, Erica, are there any other questions?

No?

Well, if that's the case, Wallace, go ahead, or Earl, if you'd like to close this off, or Wayne, go ahead and close the conference off.

This is Wallace.

I'll go ahead and close it off.

We appreciate your interest in our company, listening to our earnings results.

We are quite pleased with where the company is and where it's headed.

And the first quarter was not that great, as most of you know, but second quarter picked it up, and it looks like that trend will continue.

We do appreciate accepting phone calls.

If you have questions, feel free to call me, call Wayne or Earl Wait, and we'll try to answer the question for you.

If we can't, we'll get the answer and get back to you.

So, with that, we -- again we thank you.

And give us a call when needed.

Thank you very much.

This concludes today's conference call.

Thank you for attending.