Natural Gas Services Group Inc (NGS) 2003 Q4 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Natural Gas Services Group fourth quarter and year-end earnings announcement conference. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. Your call leaders for today's call are Jim Drewitz, Creative Options Communications; Wayne Vinson, President and CEO, Wallace Sparkman, Director of Investor Relations; Earl Wait, Chief Financial Officer, Randy Larkin (ph), Director of Sales And marketing. I've now like to turn the call over to Mr. Jim Drewitz.

Thank you very much Erica. It's my pleasure to read the forward-looking statement, ladies and gentlemen, so please bear with me. Except for historical information contained herein, the statements on this conference call are forward-looking and made pursuant to the safe harbor provision 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 risks include among other things, the loss of market share through competition of 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 and new governmental safety, health and environmental regulations which could require NGS to make significant capital expenditures. The forward-looking statements included in this conference call are only made as the date of this call and NGS undertakes no obligation to publicly update such forward-looking statements to subsequently reflect events and circumstances. A discussion of these factors is included in the company's annual report on form 10-K SB, filed with the Securities and Exchange Commission. So with that, I'll turn the call over to Wallace Sparkman.

Good afternoon and thank you for joining us for today's conference call. Jim, thanks for reading the forward-looking statement. As was mentioned, we also have available on this speakerphone, Wayne Vinson, the President and CEO of the company; Earl Wait, Chief Financial Officer and Randy Larkin, Director of Sales and Marketing. If there are any shareholders or other interested parties that fail to reach us any time in the corporate office, please feel free to call Jim Drewitz at 972-355-6070.

Hopefully, you have all had the opportunity to review this morning's news release on our fourth quarter and year-end financial results. I hope you are as pleased with the numbers as we are. I'm not going to review all the numbers but touch on the highlights so we can leave plenty of time for questions and answers.

Revenue for the fourth quarter increased 66 percent to 3.5 million, as compared to 2.1 million for the same period in 2002. Revenue for the 12 months ended December 2003 increased 24 percent to 12.7 million, as compared to 10.3 million for the same period in 2002. Obviously, we had a very strong fourth quarter and a strong quarter-over-quarter growth. In the sales of parts, equipment and labor for the fourth quarter, we were up a very significant 68 percent from 586,000 in 2002 to 987,000 in 2003. For the year, these sales were down 11 percent to 3.8 million from 4.3 million a year ago. That 11 percent percentage decrease is, however, less than 58 percent decrease we saw in the first quarter of 2002 and the 20 percent in the second quarter. So clearly, we are beginning to see a rebound in the sale of parts, equipment and labor.

The gross margins for the fourth quarter rose 87 percent and for the 12 months, rose 42 percent versus a year ago. This was largely the result of strong growth within our high-margin core leasing business. Our core leasing business is the strength and backbone of our strategic business plan and that is to grow and expand our core leasing business. Leasing income for the fourth quarter from rental of natural gas compressors increased 66 percent to $2 million as compared to 1.1 million for the same period last year. Leasing revenue for the 12 months increased 61 percent to 7.1 million versus 4.4 million for the same period last year. This increase is the result of units added to our rental fleet. From December 31, 2002, to December 31, 2003, the company added 125 gas compressor rental units to our rental fleet. This included 28 units purchased from Hi Bon (ph) Engineering Company. Horsepower of the equipment in the rental fleet increased from 32,166 horsepower at December 31, 2002 to 44,505 horsepower at December 31, 2003. Horsepower growth rate was 38 percent, while the number of units grew by 46 percent.

Our gross margin on equipment leasing continues to remain quite high. The percentage decreased slightly from 73.5 percent to 73 percent for the 12 months. This decrease mainly resulted from a slight increase in maintenance expenses associated with the rental units. I might add that we opened two service centers during the year, so staffing does and getting them up and running added a little bit to the cost, so it's not unusual that we would see this half percent drop. Historically, our equipment utilization rate averages between 88 and 92 percent. Today, I am pleased to tell you that our equipment utilization rate is approximately 91 percent.

EBITDA for the fourth quarter rose 81 percent from 681,000 in 2002 to 1.2 million in 2003. For the 12 months, EBITDA rose 25 percent from 3.5 million in 2000 to 4.4 million in 2003. This was largely the result of strong growth within our high-margin leasing business.

I'd like to highlight a few other pertinent items. At December 31, 2003, diluted earnings per share for the fourth quarter were 9 cents in 2003 versus 2 cents in 2002. For the year ended December 31, 2003, earnings per share were 23 cents versus 16 cents at December 31, 2002. We also had a very nice increase in share price. The price was at $3.88 (ph) on December 31, 2002, and we ended the year of 2003 at $5.55 per share. We had net cash flow from operating activities of 3.1 million during the 12 months of 2003. This was primarily from net income of 1.3 million plus depreciation and amortization of 1.7 million, an increase in accounts payable and accrued liabilities of 543,000, plus an increase in deferred taxes of 672,000, offset by an increase in inventory of 1.1 million and an increase in accounts receivable of 392,000. The reason the inventory is growing is principally because of equipment that we are buying to manufacture additional rental units for the rental fleet.

With the conclusion of this report, we'd like to open it up for any questions. So if you have a question for any of us, please queue in and we'll try to answer it.

(OPERATOR INSTRUCTIONS) Roger Reynolds, retired.

Hello there. The numbers just look outstanding; congratulations. You said a few minutes ago that you opened two new service centers. How many do you have and where are they?

We have a service center in Midland, Texas -- that is -- also our corporate office is located in Midland. We have a service center in Lewiston, Michigan, and we opened our facility at Bloomfield, New Mexico, that was the first we opened. The last one we opened was at Bridgeport, Texas. Bloomfield is in the San Juan basin, or Four Corners area, as it is known and Bridgeport, Texas is in the Fort Worth basin.

Okay. A different question is based on your outstanding growth, do you have any idea how many units that you would have a sort of a goal of placing this year?

Let me let Randy Larkin answer that.

. Thanks for the question. This year, we're looking at adding somewhere in the upwards of around 200 rental (ph) units, probably end up being slightly shy of that due to our current production levels. But our current demand levels tell us everything that we're doing right now is the right thing. We're putting a good mix of standard equipment and fleets that fits within our niche and fits with what our customers are asking for so, that is our growth target this year.

Fantastic. (indiscernible) to go up 125 in '03 and then 200 (technical difficulty) would be some outstanding growth.

That 200 would be governed by availability of capital to build on Roger, so.

Of course. Now then a different question is -- you read about just thousands of wells in Appalachia and all of the wells out in New Mexico and Oklahoma and so forth. And do you all have any kind of a handle as to what the total number of potential wells there are -- might be in the country? What market share that you would have and how big your market is?

Roger, one area that we point to is the San Juan basin, and I believe statistics show that there's over 20,000 wells in the San Juan basin. We estimate that probably no more than 20 to 30 percent of those currently have wellhead compression. Plus we know that they're permeated 10,000 applications that are on hold because of environmental reasons. So, to give you an answer of all the basins in all of the areas, that's kind of impossible.

I understand that after your answer. So 20,000, in that one if you went up into Kentucky and West Virginia, Pennsylvania, you've probably got that many again.

Probably so, yes sir.

I see. Your horsepower thing you talked about, approximately what does it cost to manufacture a compressor that you would lease?

To manufacture a compressor, you would lease you can figure somewhere in the neighborhood of 50 to $70,000, depending on the horsepower. Initially, it's about $6000 a horsepower.

6000 per horsepower, is that correct?

Per horsepower.

That's all I can think to ask right now, so if somebody else wants to get on, jump on.

David Rogers, Benchmark.

I've got a couple of things. First of all, congratulations on the outstanding periods, both the quarter and the year. What internal standards have you guys established for your cash on-hand? Your current ratio looks to me to be at the end of the year was less than 1. I think I've observed previously, it seems a little bit light. What internal standards (ph) do you have?

Roger, as you probably know from a prior release, we executed a $10 million line with the bank. And so we draw that as low as we can just so we don't have to pay excessive interest. Interest starts as we draw it. So the $10 million is earmarked all to build compressors for this year. Somewhere probably fourth-quarter, depending on conditions and that sort of thing, we will be looking to need to do some equity and/or some kind of debt financing at that time. We're very cognizant of dilution to our shareholders since we're all very large shareholders. I hope that answered your question.

It did, thank you. In the cash flow statement, one area I would like if you could provide some more color on -- use of cash in the line about purchase of property and equipment, which increased from 4.4 million to 7.8 million. Is that related to the leasing operation, or what is the explanation?

Yes. That includes the additional equipment that we have built during the year, and also (inaudible) we've extended (ph) our service fleet, it also includes that, but mainly leased equipment.

Okay. In looking at the components of your topline performance, what typifies the customer who chooses to buy compressors versus those that prefer to lease? And Randy, that's probably a good question for you?

Well, given my background in the (indiscernible) industry, I will answer it this way. Within our current niche, which is that small to midrange horsepower, there's probably not as much capital spending that goes along to buy a lot of the equipment of our size. But it also depends on the type of applications that they are looking to buy. Typically on a larger end is where you see many of our customers buying equipment, spending their capital to buy equipment, you know for long-range, long-term projects where a very large majority of our smaller end horsepower is leased compression, which although it may stay out there in 1, 2, 3, 4, 5 years on a given lease, you see a lot of that equipment moving around within a customer's strategic area, wherever that may be. So does that answer your question?

Yes, that's a pretty good job. With regard to the service and maintenance income, now if I remember from one of my earlier conversations with a couple of you guys, the service and maintenance income -- is that primarily from a focus up in the Michigan area?

That's correct. We service some 35,000 plus or minus horsepower.

Okay there's a geographic aspect to that segment. Is there some elements of that segment that could be exported to other -- some of the other geographic regions, like in Texas and New Mexico and so forth, that you operate in?

Now that we have service centers established, we are looking at that, yes.

Okay, one final thing. What constraints are you facing with regard to taking advantage of the market opportunities you know posed by this continuing period of high gas commodity prices? I mean, where are you at manufacturing-wise and I think you alluded to it earlier, what are your limits to your lease financing?

This is Randy. I will answer it, at least from my end. I'll let Wallace answer relative to the financial end. But from my end, the demand is certainly there. We've got tremendous amount of growth potential. It's probably from my end is a facility and capacity limitation here to be able to build as many units as we would like to. But then you've got the money in, which I'm sure Wallace can talk to you there.

As I was saying, that's an ongoing target for us, David, to be sure that we don't have lapse in that to shut back on the rental fleet and let somebody move in on our customer base.

Do you have a backlog? An order backlog?

Our backlog for units that we have assigned numbers to, and that they virtually have homes for is roughly 2.8 million (multiple speakers).

That's in terms of gross . Dollars what about with regard to numbers of gross units?

That 2.9 represents roughly.

Were doing approximately 15, 16 per month.

I'll drop out of the queue, let somebody else get in. Thanks again.

Zane Gurley, Nightenger, Tucker and Bruner.

Wayne, first of all, congratulations. You've come a long way from 10 compressors and 20,000 in income four years ago.

Thank you, Zane.

This is for Real. Earl, unless I'm reading this wrong, it looked like your G&A ticked up a little like a half a percent. I thought that was a little curious to because you had the IPO expenses last year and yet the G&A ticked up as a percentage. Can you tell me why, or did I read that wrong?

I think that small percentage, Zane, came basically from some of three areas that we're having to cover as far as investor relations and in that area.

And legal fees.

Yes, of course. (multiple speakers) you might want to retain them instead of paying by the hour. Anyway, next question (technical difficulty)

Ed Irvin, Wachovia Securities.

Great quarter, guys. Wallace you're living up to everything you say in the past, so I'm really impressed. What do you think -- I missed the part on the horsepower. What was the horsepower growth of this year over last year?

38 percent.

Horsepower was up 38. What I'm trying to figure out -- what do you think the horsepower will be up? In other words, are you building more -- bigger units now? Is the horsepower going to climb faster than units in '04?

Probably so (multiple speakers) as compared to other years, it will be up, we think, Ed.

Have you started your second shift yet?

No, we're at 55 hours per week or more -- (indiscernible) four 11-hour days and on Saturday.

What would make you go into a second shift?

I will let Waned answer that.

Ed, a second shift is not very economical, but what would cause it is when we couldn't find enough physical space or manpower to take care of it in the second shift.

So, you would rather keep it as a single shift right now then?

, Yes. When you go to a second shift, you will lose about 40 percent of your production versus daylight shifts.

People don't like to work at night?

No. You end up with people who aren't skilled, not good supervision, things of that nature.

How about giving everybody on the conference call a little update on -- if I have a coalbed methane well and I put one of your compressors on it, what kind of returns can I See under these kind of pricing conditions of.

I can allude to one. I think I've mentioned it to you where we put a unit on, on two wells, they were producing about a half million a day. We started up the new compressor and first flow was about 1.3 million (ph). They cut it back to between Mcf and a million a day for operation purposes, but that was a double. You take 500 Mcf a day times five-dollar plus gas, and you can see that it's a pretty substantial cash flow for that producer.

Would that be a typical unit, not one of the large ones?

That was 420 horsepower. It was one of the larger ones, but the smaller ones very (indiscernible) maybe it's probably economic if they have a well that's maybe 25 to 30 Mcf.

I was going to say, in today's market, it doesn't take much to go ahead and justify putting compression on a well and just how much flow you're looking at or volume of gas determines what size compression you can put on. But generally speaking, on the small end, it wouldn't take, like Wallace alluded to there, 30, 40, 50 Mcf a day to go ahead and just put compression on it. Incremental growth of that much volume (indiscernible) without putting compression on it.

What would you do to a small well? Would it double it to?

Well, that really all depends on the downhole parameters of what a well is willing to do. Many different wells do different things, even in coal seam gas.

Some will more than double.

My personal gut feeling is coalbed methane is going to be the fastest-growing of all the natural gas production. And am I right in almost every one of the coalbed methane has to have a compressor or not?

Yes. Over time, certainly.

Pretty quick over time too (multiple speakers).

That's a great market then. I know you're right in the middle of it. Are you all going to spend up north in the (indiscernible) area or any of those new areas of coalbed methane, Appalachian?

We continue to get the facts on it. I am not sure that -- we don't want to outstep ourselves from a service component, because that's really what makes us a leader in our niche is that we provide quality equipment, but the service goes with it and we don't want to get into an area of not being able to do that service.

I don't want you to screw up your good reputation, that's for sure. And last question -- what about acquisitions? Are there any small companies that have compressors in a different area or something that you could be looking at?

We continue to look -- and look at situations. There's a lot we've figured out we don't want (multiple speakers) would make a good fit, so we continue to look.

Congratulations on a great quarter.

At this time, we have no further questions. This concludes today's conference call. Thank you for attending.