Natural Gas Services Group Inc (NGS) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Natural Gas Services Group three months and 12 months ending December 31, 2005 financial results conference call. At this time, all participants are in a listen-only mode. Because of the filing of the Company's registration statement with the SEC that was announced in a January 2006 press release, the Company is in a quiet period and will not be accepting questions during the call. Operator assistance is available at any time during this conference by pressing star zero. Your call leaders for today's call are Jim Drewitz, Investor and Press Relations Representative; and Steve Taylor, Chairman, President, and CEO. I'd now like to turn the call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

Thank you, Mandy. Good morning ladies and gentlemen. Please allow me to read the forward-looking statements. Except for historical information contained herein, the statements in this conference call are forward-looking and made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Natural Gas Services' 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, new governmental safe, healthy, environmental regulations, which could require Natural Gas Services Group to make significant capital expenditures.

The forward-looking statements included in this conference call are only 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. A discussion of these factors is included in the Company's annual report on Form 10-K SP filed with the Securities and Exchange Commission.

And as a reminder and as was announced in our news release dated February 14, 2006, the Company will not be accepting questions during this morning's call. So, with that said, I will now turn it over to Mr. Steve Taylor, Chairman, President, and CEO of Natural Gas Services Group. Steve?

Thanks Jim. Good morning and thank you everyone for joining me in Natural Gas Services Group's fourth quarter and full-year 2005 earnings call. As announced this morning, the Company continues to grow at an exceptional pace in all portions of our business and in all geographic areas. We had a great year and I'm very happy to discuss our results with you. I'll review the financials first, but as I compare earnings and income figures, I want to remind you that we're comparing operating results, which do not include the financial effect of extraordinary life insurance proceeds the Company received in the first quarter of 2004.

From a revenue perspective, fourth quarter of '04 was $4.7 million and the fourth quarter of '05 grew to $13.8 million, it was a 191% increase. Our full-year '04 revenue was $16 million compared to our full-year '05 revenue of $49.3 million, a 209% increase. Our net income in the fourth quarter of '04 was $663,000 compared to $1.4 million in our fourth quarter of '05, a 109% increase. And our full-year 2004 net income was 1.8 million compared to full-year 2005 net of 4.4 million, a 144% increase. Our sales, general, and administrative expenses for the full-year 2004 were $2.6 million or 17% of revenue compared to our full-year 2005 expense of $4.9 million, which is 9.9% of revenue. This is one of the obvious advantages of the SCS acquisition and consolidation.

From an EBITDA standpoint, our fourth quarter of '04 was $2 million, fourth quarter of '05 was $4 million, for a 100% increase. And the full-year 2004 had EBITDA of $6.3 million versus full-year 2005 of $13.3 million, a 111% increase. On a fully diluted earnings per share basis, 2004, we were at $0.29. For the full-year 2005, we had $0.52 earnings per share. With steady growth on our EPS throughout the year, fourth quarter of '04 was $0.09, first quarter of '05 was $0.11, fourth quarter of '05 was $0.15. Our fourth quarter of '04 versus our fourth quarter of our '05 shows a 67% increase on our earnings per share. Our full year increased 79%, in spite of our fully diluted share count increasing over 33% in the same period last year.

Now, those comparisons were on a company-wide basis. But, I also want to look at our two largest revenue segments, which are compressor rentals and compressor sales, in a little more detail. Each of these segments had sequentially higher revenue growth quarter-to-quarter throughout 2005. Total sales revenue grew from $24.6 million in 2004 on a pro forma basis to a consolidated $30.3 million in 2005. Just over three quarters of this revenue is our engineered products business, which is custom compressor fabrication and sales in the 100 to 1,500 horsepower range, with the balance being parts of flare sales. This represents a 23% annual growth rate. Sales revenue can be variable on a quarterly basis, but we saw steady growth quarter-to-quarter in '05. Our first quarter was $7.1 million, second quarter 7.4 million, third quarter 7.5 million, and we ended the year with the fourth quarter at $8.2 million.

Our gross margin on our sales revenue component was 23% for the full year 2005, with our engineering products being at 21%. These are excellent margins relative to the industry. The custom fabrication backlog at our SCS subsidiary in Tulsa is at a record level. We are booked all the way through 2006 and have now started scheduling orders into January 2007. We have increased our unit throughput at SCS substantially in 2005. We built 167 packaged units in 2004 and 244 in 2005, a 46% increase. I am glad to report that our acquisition and integration of SCS into the company has progressed very well, as evidenced by the record unit throughput and revenues that we achieved there in 2005. 2005 was a great year for our sales business, where we had an even higher level of growth in 2005 in our compressor rental revenue. The fourth quarter of '04 had compressor rental revenue of $3.1 million. It grew to $4.9 million in the fourth quarter of '05. This is a 59% increase in 12 months. Gross margin in our rental business was a solid 61% for the year. Our rental fabrication backlog represented by the units we have in our work-in-process, which is various stages of build from order to fabrication, is presently at 148 units for 2006.

From a rental fleet perspective, we predicted that we would grow the fleet by 250 to 300 units by the end of 2005, and we hit that dead-on. We started the year with 586 rental compressors and added 279 units for a 48% increase in '05. We ended '05 with 865 rental units in the fleet at a utilization rate of 94.8%, that was also slightly higher than 2004. Between 2003 and 2005, we have increased our rental fleet by a compounded growth rate of 42% annually, and we anticipate increase in our rental fleet by 30 to 40% in 2006. We have stated that one of our strategies is to increase our higher margin rental revenue to a larger percentage component of our total revenue and we are also seeing progress in that respect. Since the acquisition of SCS in January of last year, when our sales revenue took a large jump, our rental revenues have moved from 31% of our total revenue in the first quarter of '05 up to 36% of our total revenue at the end of the year. Now, we do continue to see increase in labor and goods cost in our custom fabricated products, but we offset those on a continual basis by raising the selling price of those packages. The costs are also rising in our rental operations and those have been mitigated with two price increases in 2005, and one we just had in January of 2006. We implement these through a combination of higher rental list prices and general operating price increases. Our average rental price per compressor increased almost 6% per unit in 2005. We have kept ahead of the cost curve, as is demonstrated by the stability in our margins.

According to the Gas Compressor Association, which is the only data clearing house for rental compression in North America, we continue to make significant market share penetration in our rental horsepower range of 0 to 500 horsepower in the states we operate in. In 2003, our market share was 6%, it grew to 8% in 2004, and we had an 11% market share in 2005. So, we have almost doubled over the past two to three years. We have also continued to diversify our rental customer base over broader population. Our top 10 rental customers in 2003 represented 86% of our total revenue. Our top 10 rental customers dropped to 79% and 71% in 2004 and 2005, respectively. So, we have been able to spread our customer base as we have planned. Our service and maintenance business, which is where we perform maintenance on customers' compressors, grew 29% in 2005 when compared to 2004. This business is only about 5% of our total revenue, but it continues to deliver a relatively good gross margin, which was 39% in 2005. We will, however, be de-emphasizing this in 2006, not because of its size or any performance concerns, but because we have chosen to preferentially deploy our experienced service personnel into our rental business.

I also want to highlight our CIP compressor, which is our proprietary reciprocating compressor product line. We have high expectations for this product for a number of reasons. We manufacture this compressor ourselves and are able to deliver it in five to six months. For comparison, the most popular competing compressor has delivery stretching out to almost one year. In 2003, we built 74 CIP compressor frames. We built 138 in 2004 and 213 in 2005. We continue to sell them to outside customers, but they are also becoming quite popular in our rental fleet. To accelerate our growth, we have positioned a full-time dedicated Product Manager to set our long-term market distribution strategies for the CIP compressor. Majority of our rental compressors continue to go to our largest and busiest areas of the San Juan basin of northwest New Mexico and the Barnett Shale of north-central Texas, but we are also seeing good growth in all areas. We grew our compressor unit count by 56% in the San Juan basin in 2005 and by 39% in the Barnett Shale. We had an aggregate increase in all other areas combined of 38%. Our previously discussed expansions in the Rocky Mountains and Appalachian basin are going well, and we expect good things in those areas in 2006. Compressor units rental grew by 49% in 2005. When this is combined with our rental fleet growth of 48%, we see the rise [in utilization] that was previously mentioned.

Besides our geographical expansions, we are also evaluating various ways to increase our effective fabrication capacity. We are looking at options ranging from outsourcing to process and layout improvement to facility expansion and all combinations thereof. We are happy to be able to produce about 80% of our needs in this [peak] market for our peak requirement for our customers and outsource the other 15 to 20%. This allows us to participate in the market as we need to and also be prepared in the future for any flattening of activity that we might see.

From a balance sheet perspective, we continue to be in a strong position. Our current ratio in 2005 was 2.2 versus 1.1 in 2004. Even with our purchase of SCS last year and the addition of $11 million in debt from it, we paid down almost $13 million in bank debt in 2005 and showed improvements in our debt-to-total cap and debt-to-EBITDA ratios in 2005 versus 2004. We are setting ourselves up to continue to grow with this very good market by enhancing our access to capital. We recently announced an increase in our line of credit facility from $2 million to $10 million and we filed for a common stock offering of 2 million shares on January 6 of 2006, with the proceeds to be used for rental fleet expansion and debt reduction. We had a very good year and are confident that 2006 will continue to be active. We have solid operations in our existing areas, with new growth opportunities in the Rocky Mountains and Appalachian basin, in addition to others we haven't even touched yet.

Since we are talking about our growth and expansion, I want to hit on our position in -- on the direction of the natural gas markets in the US. As I mentioned, we build custom packages in numerous configurations in our engineering products business and will continue to participate in the growth in that area, but our primary strategy is to grow our rental business to be the largest revenue component of our company. In this respect, our focus is and will continue to be in the small-to-medium horsepower, non-conventional natural gas, well-head compression market. According to the Energy Information Administration data, the numbers keep reconfirming themselves with respect to the size and growth of the natural gas market we have chosen to compete in. For the general natural gas market, the following remains true. The natural gas supply/demand imbalance in the US continues to grow, with demand growing at 1.5 to 2 times the rate of supply. Gas wells are declining twice as fast as they were 15 years ago. Gas well drilling was up 20% in 2004, but gas production was down 3%. And natural gas prices continue firm. The average in 2004 was $6 an Mcf, it was $8.88 in 2005, and is estimated to be $9.30 in 2006.

From a general supply standpoint, the following will continue to support natural gas activity and commodity pricing. Imports from Canada are declining due to their own increased domestic needs and well depletion. Gas production from Gulf of Mexico, traditionally our major source of natural gas supply, is declining and declining faster than projected. LNG imports will grow in the future, but they are already off to a slower start than what was originally forecast only last year. And there are no appreciable supply sources coming online for the next five to ten years. Effect those factors and roll in the dynamics of unconventional gas, which is natural gas extracted from coal beds, gas shales, and tight gas formations, and again this is our focus, which we see unconventional gas being the single largest component of gas supply in the US, the fastest growing component of gas supply in the US, it's projected that unconventional gas will be the major contributor to gas supply growth in the US in the future and will account for 45% of the supply in the US by the year 2030. And unconventional natural gas wells are typically less prolific, produced in lower pressure than conventional wells. More wells have to be drilled to deliver equivalent volumes of gas and they need compressions sooner and with a greater frequency.

Now, let me give you a quote from the Energy Information Agency in their Annual Energy Outlook 2006 overview, which was just published last month in January 2006. ”LNG imports, Alaska natural gas production, and lower 48 production from unconventional sources are not expected to increase sufficiently to offset the impact of resource depletion and increased demand.” What this is saying is that, in spite of all we domestically produce and externally import, it will still not be enough. We won't run out, we will see the search for natural gas continue to be an irreplaceable and very important part of the total energy picture in the US for many years to come. You add all this up and it leaves a very vibrant picture for our business going forward in the short-term and the long-term. Our small-to-medium horsepower, well-head, unconventional natural gas focus is our sweet spot, it is our strong suit. Not only have we successfully participated in the growth of this market to this point, but this is exactly what the future is. Our strategy is dead-on, we are executing well, we are exactly where we should be. We are hitting on all cylinders.

But, before I close, I want to make sure that I acknowledge all of our employees and their families. This year was successful due to their diligence, efforts, and support and I personally thank every one of them.

Because as it was mentioned at the beginning of the call, we will not be able to take any questions due to the registration period we are in, but look forward to reporting back to you after this quarter and catching up on those questions. Thanks for joining me.

This concludes today's teleconference. Thank you for joining.