Natural Gas Services Group Inc (NGS) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Natural Gas Services Group third quarter earnings and nine-month financial results conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Your call leader for today's call are Jim Drewitz, Creative Options Communications, and Wallace Sparkman, President and CEO. I would now like to turn the call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

Thank you, Erica. Welcome, ladies and gentlemen. Please allow me to read the forward-looking statement. Except for historical information contained herein, the statements in this conference call are forward-looking and are 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 risks 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 gas prices, which could cause a decline in the demand for NGS's products and services; a 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 takes 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-K SB filed with the Securities and Exchange Commission.

With that done, please allow me to introduce Mr. Wallace Sparkman, President and CEO of Natural Gas Services Group. Wallace?

Thank you, Jim. Good afternoon and thank you for joining us for today's conference call to discuss the progress of the Company. I want to encourage you to call in and ask questions after our presentation if you need additional information. Joining with me on this call are some of the key members of our management team. Those are: Earl Wait, Chief Financial Officer; Craig Rogers, Vice President of Operations; Randy Larkin, Vice President of Sales and Marketing; Scott Sparkman, Lease Contract Administrator and Corporate Secretary. Also in the room with us here is [Jim Hazelett] with Screw Compression Systems Inc., which we're going to be discussing some today, and also joining us by telephone hookup is Paul Hensley. Paul is President of Screw Compression systems in Tulsa, Oklahoma. All of these will be available for questions at the end of this presentation.

This year has been an exciting year for our company. Some of the things that your management team and the directors have accomplished are to strengthen our financial base by negotiating a private investment of $5 million in equity in the Company. We have continued toe grow or compression rental fleet on a consistent basis. We've expanded our market area and added new customers. We have continued to add quality employees to our team. We have been exceeding our income and cash flow [inaudible], even though we are a little behind in our revenue, as according to plan. By the end of this year, our revenue from compressor leases will exceed $1 million per month and will continue to grow. This continues to provide a gross profit of approximately 70%.

Probably the most significant event was the signing of a contract to acquire Screw Compression Systems Incorporated, referred to as SCS, in Tulsa, Oklahoma. Bringing our company and SCS together moves us to a new level in business. The addition of [Paul Hensley] and his team bring significant depth to our management team. Paul will be elected as a director of the Company and will continue in his position as President of SCS. With the addition of SCS, our combined revenues in 2005 should fall somewhere between $35 million and $50 million. The acquisition will be accretive to earnings per share and will provide additional cash flow to accelerate the growth of our rental fleet.

Now, I would like to discuss the results of operations for the third quarter and nine months. Revenue for third quarter ending September 30, 2004, increased 5% to $3,870,000, as compared to $3,700,000 for the same period in 2003. Revenue for the nine months ended September 30, 2004, increased 21% to $11,221,000, as compared to $9,264,000 for the same period in 2003. The increase in revenue during the third quarter and nine months reflects an increase in revenue from the rental of natural gas compressor units and a flat increase in service and maintenance revenue.

Our gross margin percentage increased from 52% for the nine months ended September 30, 2003, to $56% for the same period ended September 30, 2004. This improvement resulted mainly from the relative increase in leasing revenue as a percentage of total revenue. As I have mentioned before, rental fleet carries a gross margin of approximately 70%, and an increase in rentals improves our total gross margin. Net income for the three months ended September 30, 2004, increased 17% to $451,000, or 7 cents per share diluted, as compared to net income of $384,000, or 7 cents per share diluted for the same period in 2003.

I might say that the total diluted outstanding shares increased from approximately $5,389,000 shares in 2003, to 6,492,000 shares in 2004, for the periods discussed. So the earnings per share are the same but the earnings went up in the increase in the number of diluted shares is part of that reason. Net income for the nine months ended September 30, 2004 increased 231%, to $2,710,600, or 43 cents per share diluted, as compared to net income of $817,400, or 14 cents per share diluted for the same period in 2003. This increase included life insurance proceeds on Mr. Wayne L. Vincent, our former President and CEO, who passed away on March 15, 2004. Excluding these insurance proceeds, we had a 60% increase for the nine months.

Natural Gas Services rental fleet grew by 34%, during the nine months ended September 30, 2004. The Company ended the period with 533 compressor packages in its rental fleet and that was at September 30, up from 399 units at December 31, 2003, and 354 units at September 30, 2003. Today, we have about 550 units in the rental fleet. I use the word "about" because we add units on a regular basis. Each unit has a serial number and the location of each unit is tracked. So we know where all of those 550 units are at any given time.

I'm now going to call some of our officers for brief comments about their areas of the Company. First, I'm going to call on Earl Wait, Chief Financial Officer. Earl?

Good afternoon. Thank you for joining us our conference call. I'm going to supplement what Wallace has to say by talking about a few items on the balance sheet, followed by talking some about our cash flow for the period. On the balance sheet, we have approximately $4.4 million in cash at the end of the period; current assets ar proximately $9 million; current liabilities of $5.4 million. That's a 1.6 current ratio. We have approximately $40.7 million in total assets and our equity is at 22.1 million. This represents a significant in growth, 47% growth in our total assets and 59% growth in equity.

A few items on the balance sheet. We had a significant increase in our cash provided from operations for the nine months, up $4.7 million for the nine months. Included in that was the $1.5 million, of course, that Wallace mentioned on the life life insurance proceeds, but even excluding that our cash flow from operations was $3.9 -- $3.2 million compared to $1.6 million a year. This is a 100% increase in our funds provided from operations.

A little bit of what we have done with those funds. We have invested approximately $9 million for the nine months in lease equipment and also for trucks to service that equipment. To accomplish all of this, we have borrowed approximately $5 million. We have repaid debt of approximately $1.8 million. That's a very improved use of our cash flows. Of course, during the period, also, which Wallace pointed out, we received approximately $5.1 million in the sale of stock in private placement, and also some money that we raised from sales of [inaudible.] This left us with approximately $4.4 million in cash at the end of the period. I will turn it back to you, Wallace.

Okay. Thank you, Earl. That was a good report. Next, I'm going to call on Randy Larkin, Vice President of Sales and Marketing. Randy.

Thanks, Wallace. Good afternoon, everyone. As Wallace indicated, our fleet presently consists of over 550 units totaling over 61,000 horsepower; we are expanding rapidly. Combined with our contract service of over 65,000 horsepower, including the recent service contract of over 35,000 horsepower to a large utility company in Michigan, we presently service more than 126,000 horsepower as a company. Utilization continues to be high as a result of growth and demand coming from our primary operating branches in the San Juan and Fort Worth basins, as well as growth in south Texas in the Permian Basin. We are working hand-in-hand with our clients to ensure that our production mix meets their demand.

We are maintaining an aggressive and proactive approach to ensure efficient asset management and providing our clients the right selection of equipment in accordance with their in-field upgrades and new drilling programs. Consequentially, we are anticipating demand that will require an increase of equipment production levels to a projected total of 300 additional fleet compressor units for 2005. This volume will be attainable through the expanded hydrogen capabilities of the SCS production facility in Tulsa. SCS will begin production of fleet units in January.

Our customer base continues to expand and strengthen through direct relationships, our continued ability to provide equipment on demand, our focus to provide high quality, state-of-the-art equipment, and attention to service and run time. We also continue to be proactive in staying in front of our client's forecasted needs by designing and adding new model designs to our standard equipment selections. Wallace also highlighted the SCS acquisition; we are excited about the opportunity the acquisition, SCS, will provide.

For instance, among other proprietary products designed in the preferred vendor relationships, the SCS acquisition brings the addition of a new model of reciprocating compressor, the CIP model. The CIP model provides an attractive opportunity to substantially reduce overall package costs, ultimately improving lease margins. SCS located in present -- in Tulsa, will give us an immediate opportunity to expand opportunities in the midcon region and throughout the [Arcoma] basin.

In a direct response to this anticipated opportunity ,we have added business development manager to our sales and marketing group. This individual has over 30 years of experience in the natural gas compression market throughout the continental U.S. and South America. He will also work with SCS to provide continued business development of the SCS account base and target broad account development to existing and new clients in the major Metroplex, and metropolitan centers, including Dallas-Fort Worth, Houston,and Denver, among others.

SCS already has a strong engineering support structure. Our combined size will permit us to expand and enhance our engineering group. We are adding a new engineer here in Midland to further strengthen our design and application needs. This individual will also provide sales coordination support, to allow our sales team more freedom and flexibility to maintain direct contact with our customers and prospects. I think that hits the highlights at the moment. Wallace?

Thank you, Randy. Now, I'll call on Craig Rogers, Vice President of Operations. Craig?

Thank you, Wallace. Good afternoon. As Randy mentioned, we're very excited in Midland with the acquisition. We have a very upbeat attitude in the Company, throughout, knowing that this edition increases floor space threefold for our manufacturing, for more compression and flare equipment. Natural Gas Services Group will be able to service a wider array of customers.

As Randy mentioned we are excited about this CIP compressor. We currently have five of those in manufacturing in the Midland facility. We're also continuing with multiple sizes of Screw Compression equipment, flare equipment, currently on the floor in Midland. With the $6 million of [inaudible] and compressor equipment on the backlog in Midland, and an additional 6 to 8 million in compression on the backlog in Tulsa, we look forward to beginning 2005 on strong foot.

The combined Midland and Tulsa business brings more of a balance of sales and lease equipment, rather than lease equipment dominating the backlog. With the acquisition adding to the existing customer base, it also strengthened the Company's purchasing power, as Randy mentioned, as we move into 2005 also bringing about the same do services of adding to our personnel, our inventory, to service the additional equipment in the field. Let me thank you for your attention and turn this discussion back to Wallace.

Thanks, Craig. I mentioned that Paul Hensley is available on this phone call. I promised him, since he is knew to a public company that he would not be asked to make a report today, but he is available to answer any questions that you might have concerning SCS and what he sees that it means to the combined companies. So with that, Erica, let's open it up for questions.

Ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator instructions.] Our first question comes from [Zane Gurley from Nightinger, Tucker and Brenner.] Please state your question.

Hi. Folks, I just have a couple, three questions. So if Erica, if you can hold on here while I ask them all. Number one, Randy Larkin, did you say -- how many compressors did you feel that you could add to the lease fleet in the next year? 300?

Yes, sir.

300?

Yes, sir.

What does that represent in potential horsepower, please?

You caught me. Hang on. Roughly, 33,000.

33,000.

Yes, sir.

Okay. So right now -- okay. 33,000. And you are going to get approximately six more per month out of Tulsa, and you are going to get -- where are you going to be able to do the rest -- let's see, six per month out of Tulsa. What can you do out of Midland or you have to add a new facility?

I'll jump in here and say that we produce about six, and it can go to eight units, in Michigan. By doing the [resips] in Tulsa, which they take up a lot more floor space, we can increase the number of screw compressors we do in Midland. We think that by utilizing the space properly, that will get us into late next year. Do you agree, Craig?

So you can add those -- so you can add 300-plus compressors with the facilities that you have in place right now?

We think so, yes.

Okay. With the same number of shifts, the same number of people, blah, blah, blah?

There will probably be some addition of people in some of the shops, but --

Okay.

-- basically not anything major.

Okay. Next question. And then I have a third question. Mr. Hensley, I'm just curious as to why you decided to join the -- why you decided to come under the umbrella here and join forces here with NGS. I would like to hear your answer on why you are coming on board here.

The opportunity arose when we started discussing the relationship, probably six months ago, that our combined companies would look stronger than apart. That was an interesting concept that Wallace brought. We have historically, in our seven-year history, been primarily a sales group of custom packages for our clients. We see others in the business that do that as well, but many times you see most of the major players in the market have some sort of rental equipment presence.

We had not chosen to take that route but in the last few years had started to consider that as an addition and a way for us to grow. And after discussing the possibility of our combined companies, it made a lot of sense to me that instead of building from scratch here, why not combine and have a head start on the rental side of the company.

Thank you. Wallace?

Yes.

One question I have -- and I guess you've answered this in part by your 35 to 50 million wide lens view of next year -- but going forward here through the end of the year and through next year, you feel pretty strong about the growth picture, you're building to meet demand and demand that's there, the ability to keep your margins, strong, et cetera. Just comment, in general,about the look forward -- I'm not looking so much about specifics, but a little bit more on your vision here.

I agree with Paul and that is one of the things that made this -- let's call it a merger -- so important, is to take advantage of the opportunities that are out there. Randy and the salespeople polled our existing customer base to see what their needs might be for this coming year, and we were sort of staggered by what they need. And that's where this number of units comes from. Those aren't spec units.

They are pretty well asked for by our customers. And with SCS, we have very little overlap in customers. So we now have opportunities to not only sell, but also to lease. So it just makes sense and I don't think this is overly optimistic at all. If you take our revenues projected to the end of the year, and the revenues of SCS, we're already at the 35 million level.

Do you have necessary capital to reach your goals for 2005?

There's a couple of things that need to happen, but our banks have assured us that they are there to meet our needs. And we don't have it in the bank today to answer your question, Zane, but we are very confident that the capital is available.

All right. Thank you. Good report.

All right. Thanks. Next caller, Erica.

Our next question comes from Jeffrey Kerr from Kerr Financial Group. Please state your question.

Good afternoon, gentlemen. A couple of questions. One is, it looked like from the report that perhaps the lack of capacity may have caused some decrease in the growth of sales. Can you comment on that?

Randy, do you want to comment on --

Sure, Jeffrey. Thanks for the question. Obviously, the nature of our compressor and flare sales sometimes -- and often -- carries a fairly irregular patterns. We get order from quarter to quarters, month to month, week to week, whatever the case may be. It just so happened that was evident. It's not any more evident than what we saw last year in the third quarter where we recorded a fairly high level of compressor and flare sales during that quarter. But let me make a couple of notes here. Over the nine months, we're still 15% ahead of what we did last year in compressor sales, and we're also 27% -- we're achieving a 27% growth in flare sales over the same nine month period compared to last year.

One thing I want to note about flare sales is that we're also seeing a much higher level of margin this year. We are seeing 60% margins on our flare sales this year, whereas last year we only experienced 48%. So I believe we are headed in the right direction, it's just that third quarter last year was a really good quarter, and I think that's somewhat skewing the numbers to look the way they do.

So there was little or no loss of sales for not having inventory [inaudible]?

Well, I think the answer there would be we definitely had a focus on lease fleet. The demand in third quarter was just phenomenal.

Okay.

That's one of the attractions to SCS and Natural Gas Services Group is, principally, everything they have produced have been sales, and the big part of ours has been to the lease fleet. Ideally, if we could attain a balance of 70% leased units and 30% sales, that would be an ideal mix in my opinion.

Just 70/30 -- 70 rental?

Yes.

Okay.

And it will take a while to get there, but we certainly have the combination to do it now.

Okay. If I may, another question. The -- next year, as -- I joined the call a little bit late -- but I thought you said 35 to 50 million in sales potential.

Yes.

And it's not unreasonable to think that you are going to have $100 million market cap or better. Is there any effort in trying to tell the story to Wall Street and -- some efforts along those lines and maybe gain some notoriety on the Street and coverage and things like that?

Definitely. That's one of the important things that we'll be doing. We sort of got side tracked on that this year with the death of our President in March, and so everybody's been kind of "humped up," if you will, this year, with our growth and with that. But we are already making plans to do a lot more going forward.

In fact, we are signed up to appear before the New York analyst group in March in New York, and we'll be making some selected -- what I call "road shows" to some of the areas where there's been a lot of interest shown.

Okay. Okay. That's it for me. Thank you and good job.

All right. Thank you, sir. Okay, Erica.

Our next question comes from Roger Reynolds, from private investor. Please state your question.

Hello there Mr. Sparkman.

Hi, Roger.

Will you be able to publish or make a news announcement of some kind pro forma, as far as the sales or anything as of the the end of the quarter so that we can get a little bit better idea of sales, book values and so forth?

Roger, we have stayed away from predicting earnings. Those things are kind of a double-edged sword.

Excuse me, I'm looking for a balance sheet type of thing.

We can do that.

Yeah. Okay. Well, it would be helpful. I'd just like to crunch the numbers somewhere here.

Okay.

We are in the process of doing our due diligence and an audit on SCS. Sometime in December that audit should be done, which would provide you some additional information there on a pro forma basis.

But if we do that, we will have to make a public disclosure, as you know, Roger.

Oh, yes, sir. That's no problem.

But we can do that.

Okay. Then a different question. Is it -- the big -- the million -- a little over a million share jump. Some of it was from the private placement, but not all of it. Did you have a stock options or something, a lot of those?

We did have some warrants and some options that were also exercised during the nine months.

You mean the public warrants were exercised?

No. We had some warrants that were attached to some subordinated debt that was exercised.

I see.

It's been outstanding for the last few years, Roger.

I see. Okay. Let's see. Just outstanding report, and so thank you very much.

All right, sir. Thanks. Erica?

Our next question comes from Zane Gurley from Nightinger, Tucker and Brenner. Please state your question.

Paul, you just said something about the fully diluted number was affected by the warrants, et cetera. Obviously, the private placement was a part of it. You said that the fully diluted number was affected by some warrants. Shouldn't have those already been in the money and they should have been already in the fully diluted number?

Well, I was talking after for the nine months period, there were some in there.

Oh, okay. Okay. Okay. Second -- second thing is more of a comment. Jeffrey Kerr, Wallace, and whoever else was on the phone, you're a microcap company with a hell of a story as a value company, and I think it's incumbent at this point for the -- and I know you're going to be doing this -- but to get that story out and get sponsorship in a stock like this is a tough game but it's a game that every shareholder really deserves, because you guys are performing and that needs to be out there. So I just --I'm hoping that gets done. Jeffrey brought it up; I'm finishing the sentence, really. Okay?

It's interesting that you brought that up. I have not heard that from you, Zane, but I can assure you that that is equally as important as continued growth. [ Laughter. ]

Oh, Wallace. Well, good report. It was an excellent report, by the way.

All right, thanks. Erica, any more?

Our next question comes from [Robert Bonbock from Babson Capital Management.] Please state your question.

Good afternoon, gentlemen.

Hi, Robert.

Hi. Your gross margin, on a year-over-year basis, has bounced around a little bit in the three divisions that you report. It looks like it went down just a hair in leasing and went down quite a bit in service and maintenance, and oddly enough, went up in sales. Can you explain how that gross margin, why that gross margin's bouncing around like that?

Earl, do yo you want me to start? I can -- to the gross margin on leasing, it only bounces around from about 69% to 71%. That's why we use the approximately 70%. As you can see how fast our rental fleet is rolling, --

Mm-hmm.

-- and for Craig to be sure that those units are properly maintained, he's having to hire people ahead and buy service trucks, service vehicles, ahead, before we get those units out in the field. Plus, we've opened a new territory, Randy did, in south Texas, and we don't have enough units there to put a service man there yet so we're contracting that out. And Randy, do you have any comments?

I was just going to add that the Permian Basin growth as well, is similar to that in south Texas.

And so that has to do with leasing. On the sales, I think that's just a --

On the sales side there's a number of different product mixes that we have there with different gross margins; particularly, Randy had mentioned flare sales. So much of that category just depends upon what kind of mix you have. Like I said, Randy mentioned that we have the 60% gross margin in flares. So as a result, flare makes up a bigger component of that, then you've got to change. So that's why it really swings around, because of the component.

As far as service and maintenance, pretty -- that should remain pretty steady. About the only thing that makes up cost of sales in that area is labor. And so that can vary sometime, with depending on if you have overtime labor in there or straight time labor.

Didn't it just go up sharply this quarter versus last year?

Yeah. There was some significant increase in that area. And so much of that comes from the northern Michigan area, almost 100% of that up there. We have had some changes in that area where we've added some different customers and what all, which affect that and particularly as you increase the customer base in there -- we did add, I think, 35 units up there in northern Michigan with BTE to our maintenance up there. So as we're more effective with our labor, the margins go up.

Earl, if I might add, by adding the 35,000 horsepower, Robert, we're not getting revenue from that 35,000 horsepower immediately. So we are having to ramp up and add service trucks and personnel, so there's another reason for the decline. And it should average backout by the end of the year and continue next year.

All right. Is the 35,000 horsepower that you added, is that in the leasing business?

No, it's a producer operator up there.

All right. I understand.

And we're servicing it, but they turned it to us.

Got it. So the costs are kind of front-end loaded here?

Yes.

Well, you have a very attractive growth opportunity in front of you. How long will the expenses run equal to, or perhaps greater than, the revenue opportunity? Last couple of quarter you've managed to put a lot of units in the field but you haven't been able to bring down significant EPS growth on a year-over-year basis. I know I heard you say you thought could you could do $35 to $50 million in revenues next year but I also heard you duck the earnings question. Can you give me an idea on what we could -- when you can see some income statement leverage?

I think my answer was, Robert, that we purposely do not make projections on earnings because I've found, through my years in the business, that those can cut both ways. Generally, what we say is look at the trend and also look at the tracking areas and you kind of project. But once we get deeper into the SCS transaction, I think we should make a pro forma and give some guidance on that.

Do you expect at this point that your earnings will grow as fast, or faster, than your revenues?

I expect that our earnings will grow faster with SCS than they would grow without them. It's accretive to earnings per share. It's accretive to net income. And will it grow as fast as revenues? I think that since -- although their business has been sales, that your margin on sales is not as good as leasing. So it's going to take a little time to balance that out but as they produce more units for the leasing, then that's going to start producing the higher margins.

So it's sort of a balancing act there. I would say that sales normally carry -- Paul will correct me if I'm wrong -- but somewhere around 30, 35% profit margin. And with that, I think we will see a little strain on our margins, but I think we'll overcome it very quickly as we ramp up and start doing more leasing.

Okay. And lastly, have you said how you paid for SCS?

It's a combination. Yes, it's fine. We have a 10 -- 8-K that's filed with -- actually a copy of the contract to it, but it's a $15 million acquisition; $4million of it is in stock of the Company, and $8 million is cash. And the balance of it is in a three-year note to the sellers.

And how many shares of stock was it? Where did you price it?

It was tied to the earnings -- and actually this deal was reached and agreed to in March -- and it was priced at -- Jim, do you remember, $6.56, I think is what it was at that time and it was based on trailing earnings.

Okay.

Not trailing earnings, trailing share price.

Okay. Great. Thank you very much.

Okay, Robert. Thanks.

Our next question comes from Kyle Krewiger from Apollo Capital. Please state your question.

Good afternoon, Wallace.

Hi. How are you doing?

All right. Most of my questions have been asked. I was going to ask, too about -- what's the EBITDA number that would correspond to the 35 to 50 million in revenues? Is that the question you didn't want to answer?

The EBITDA number. Yeah, I can't answer that right now, but before long we can. We can look at our EBITDA, where we are now, and it will go up, I would like to say dramatically, but satisfactorily, how about that?

Yeah. With a 70/30 mix that you've got now in favor of leasing, you've got 40% EBITDA margin. I know SCS is all sales at this point but has $20 million in revenues. I mean, the numbers would get pretty interesting if you get the combined sales enterprise up to your EBITDA margin. I think that's kind of what everybody is after.

I think our EBITDA ran 42% for the first nine months, right?

Right. Yeah. Yeah.

And 5.8 million.

Yeah. Yeah. I was just wondering, on the 35 to 50 million in projected sales, if you would care to put an EBITDA -- attach an EBITDA number to that projection?

I would prefer not to at this particular time.

Okay.

Give us a chance to do a little bit more studying and we'll do a news release in what the combined entities -- we have done that internally in making the deal, but let us polish it up a little bit.

Okay. Fair enough. And, on average, when you put a system out on a lease, what kind of unleveraged return on invested capital do you expect is a hurdle rate when you put that system out on a lease basis over the life of the agreement?

Well, we have a pay out there of around 40 months on average. So that's 32, 33% return.

Yeah. Yeah. Which is incredibly strong. Let me ask you this, to try to help me better understand how it all fits together. I mean, you've got some very large, financially sophisticated customers that can borrow money at very low rates right now. I realize that you guys offer quality and excellent service and great run time, and that's incredibly important for a production operation in terms of the service and maintenance piece. But what prevents some of the customers from going out and borrowing money from GE Capital at 4.6% and unbundling the service and maintenance portion of the compressor lease?

There's more to it than just the cost of money.

Right.

If they have -- own their compressors, they are going to have to have somebody overseeing maintenance and service on it. They are going to have to carry a pretty large inventory of spare parts, and they would rather spend their dollars in discovering more reserves and turn it over to somebody that'ss professional, like us.

Yeah.

Another thing is that, let's say they put a compressor on a well today and the conditions of that well change; it either goes up production, or down. So six six months from now, they may have the wrong compressor on there. There's no trade-in on compressors, so they would have to go out and buy one to meet those conditions. And with us, we work with them. If the conditions change, we'll swap the compressor out.

Yeah. Yeah. No. I understand. You just mentioned in the discussion that you had taken over the service and maintenance of some of DTE's equipment.

Yes.

And I just wondering what -- in the mix, what would prevent a big, financially sophisticated guy like that from unbundling the whole offering on the leasing side of your business and capturing the lower money. I mean, would you just not generally unbundle a transaction like that or is the money part of it small in relation to the return derived from the sales and maintenance and run time piece?

They expect to make a bigger return on production. The DTE is a good example. They own that compression equipment but they don't have the staff or the employees to maintain it. So they contract that out.

Yeah. But they probably borrowed the money from GE Capital for 4.7%, so will your returns on that piece of business be as good as a full lease deal where you offer -- where you actually build and use your own capital also?

I understand your question now.

Yeah.

No, the margin is not the same on service revenue on other people's equipment as it is on lease equipment.

Yeah. So what prevents some of these big, sophisticated customers from unbundling the two aspects, the finance and the operations piece, and coming to you and say, "we've already bought the equipment with GE capital's money and we want you to do the service and maintenance piece," and, therefore, maybe the 30 or 35% ROIs that you get off the leasing deal may be in jeopardy or vulnerable in a cheap money environment. Or am I looking at it wrong?

I think you are seeing now why we feel that the mix of sales and leasing is ideal for us because if they are buying that equipment, now we're in a position to sell it to them and then get service on it too. So the only thing we would get would be the profit, the continuing profit from the lease, but we'll make profit on the sale.

Okay. Thank you. Continued good luck.

Okay. Thanks a lot. How is Florida?

Our next question comes from Zane Gurley of Nightinger Tucker and Bremmen. Please state your question.

I think it's all been answered.

Okay.

Okay. At this time I have no more questions.

Thank you. Thanks for everybody joining us.

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