Natural Gas Services Group Inc (NGS) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Natural Gas Services Group first quarter 2006 financial results conference call. [OPERATOR INSTRUCTIONS].

Your call leaders for today's call are Jim Drewitz, Investor and Press Relations Representative, and Steve Taylor, President and CEO.

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

Mr. Drewitz, you may begin.

Thank you, Jean.

Good afternoon, ladies and gentlemen and welcome.

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 made pursuant to the Safe Harbor provisions as outlined by the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties, which may cause Natural Gas Services Group actual results in future periods to differ materially from forecasted results.

Those risks include, among other things, the loss of market share through competition or otherwise, the introduction of competing technologies by other companies, new governmental safety, health, and 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 Group 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 SB filed with the Securities and Exchange Commission.

I will now turn to call over to Steve Taylor, Chairman, President and CEO of Natural Gas Services Group.

Steve?

Thanks, Jim.

Good afternoon to everyone joining us and thank you for joining me for Natural Gas Services Group’s first quarter 2006 earnings call.

As announced this morning, we had another great quarter and I’m happy to report that our business continues to grow at an exceptional pace.

We continue to see strength in the markets we compete in and we are very well positioned to continued to participate in the growth of the industry.

I’m glad to be able to discuss our results with you and I’ll begin with the financials, move on a little to some operating data and then finish up with a market review.

Our revenue rose 23% from the first quarter of ’05 to the first quarter of ’06, $11 million increasing to $13.6 million.

Sequentially from the last quarter of ’05 to Q1 ’06, we were down 1% from $13.8 million to $13.6 million, but this is actually in line with announced initiatives.

The largest contributor to this decline was our service and maintenance business, down by almost $400,000 in the quarter.

Our sales revenue, and I’ll hit on that a little more later on, sales revenue was down $200,000 to 8 million.

We had a record Q4 ’05 and this is a fairly variable business quarter to quarter, but that $8 million was higher than our ’05 quarterly average.

Our rental revenues were up almost $400,000.

Our gross margin year over year increased 43% from the first quarter of ’05 to ’06 from $3.9 million up to $5.6 million.

Our sequential gross margins went from $5.1 million to $5.6 million end of ’05 to this quarter, up about 10%.

This was due to higher revenues, stronger margins in our sales business, and a shift to higher margin rentals.

Our gross margin in the first quarter of ’06 for sales was 28%, service and maintenance 31%, and rentals 61%.

This compares to year ago quarter sales gross margins of 21%, service and maintenance 38% and rentals 65%.

Our sales margins very strong this quarter We had some big, high margin units go through and that brought that up.

Part of the sales revenue also includes flares, parts sales, and rebuilds, and those all had very strong margins, 45, 50, 60%.

So a very good quarter from a sales perspective.

I had touched in the past on our rental margins moving from 65 down to 61 through the year and we’re maintaining 61 this quarter.

That was due to starting to see some overhaul expenses.

We had what was one of the newest fleets in the business.

We’re starting to see some normal maintenance come in, nothing surprising.

We had some expansion expenses that we continue to incur.

Revenue will be catching up with those.

And we’re really shooting for a 62 to 63% good solid margin in the rental business.

So this puts us right where we want to be.

I will point out our rental margins are fully burdened.

We don’t capitalize any overhaul or maintenance expenses.

Our sales, general and administrative expenses increased from 1.13 million in the first quarter of ’05 to 1.27 million first quarter of this year, up 12%.

But the decline is a percent of revenue.

Year ago quarter was 10.3% of revenue, this quarter 9.3% of revenue.

We got to the bottom line with $1.7 million.

That’s an 89% increase from $900,000 in the first quarter of last year.

And we did it the old fashioned way, higher revenues and higher margins.

No currency exchanges, no capitalizing or amortizing.

Just a good business.

Sequentially up 22% net after tax from the fourth quarter of ’05 to the first quarter of ’06, $1.4 million up to 1.7 million.

EBITDA increased 59% year over year from 2.8 million to 4.5 million and sequentially from the end of ’05 to this quarter from 4 million to $4.5 million., a 13% increase for the quarter.

Our EBITDA as a percent of revenue was 33% this quarter versus 25% a year ago quarter.

Our fully diluted earnings per share increased 55% from first quarter of last year when it was $0.11 to $0.17 this quarter.

Sequentially up 13% from $0.15 to $0.17.

These were excellent results in and of themselves, but especially when we consider two impacts in the per share number we had.

Our fully diluted share count increased 26% year over year and we also had a $73,000 expense this quarter for options.

Now our business is divided into three primary segments - - sales, service and maintenance, and rentals.

Our sales revenue includes custom compressor fabrication sales to third parties, our reciprocating CIP frame to cylinder sales, flare sales, parts sales, and rebuilds.

Those all grew to $8 million this quarter up from $7.1 million the year ago quarter which is a 12% rise.

Our CIP sales, our reciprocating compressor, was $96,000 Q1 ’05.

It more than tripled to $317,000 in Q1, ’06.

Our custom fabricating sales at our SCS subsidiary in Tulsa accounts for approximately 80%, depending on the quarter, of our total sales revenue.

As I’ve mentioned in the past, this is a business that fluctuates quarter to quarter due to the mix and equipment going through the shop, different sizes, margins, and times to build.

So this is not a business to evaluate on a quarter to quarter basis, but on the quarterly trend.

And the trend is positive.

For example, our revenue from custom fab sales in the first quarter of this year were $6.4 million, just marginally higher than the fourth quarter of ’05, but 12% higher than the average quarter for 2005.

Our gross margin for total sales revenue rose 28% this quarter up from 21% the year ago quarter.

The backlog at our SCS subsidiary in Tulsa totals almost $29 million as of this April with deliveries now booked through April of 2007. that’s up from a $27 million backlog the end of ’05.

Our rentals continue to grow at a very high rate.

First quarter this year, $5.3 million in rental revenue.

First quarter of last year $3.4 million, so a 56% increase year over year.

And again, our rental gross margin continued strong at 61%.

As of March 31, our rental fabrication backlog, which we calculate is represented by the units we have in our work in progress, which is various stages of build from order to fabrication, was 171 units and that stretches out through July of 2006.

About a quarter of these units are already committed to customers which is, along with our historical average and pretty well matches the near month for delivery.

We added 55 compressor units to our rental fleet in Q1 ’06 and this will accelerate quarterly throughout the year.

Of those 55, 43 of those were our CIP compressors.

As mentioned on last quarter’s call, we anticipated 30 to 40% fleet growth this year.

That equates to 250 to 350 units.

The low side, the 250 units, is about what we added to the fleet in 2005 when we added about 286 units, so you can see we’re still in a very aggressive growth this year from the rental side.

Our utilization is continuing in the 93 to 94% range.

We have stated that one of our strategies is to increase our higher margin rental revenue to a larger percent component of our total revenue and we continue to see progress in that respect.

First quarter of last year, rental revenue was 31% of total, this quarter it is 39%.

Our gross margin from rentals accounted for 58% of the total gross margin from 39% of the total revenue.

This illustrates the bottom line leverage we experience as we execute our strategy of growing our rentals to be at a higher component of our total revenue.

For the service and maintenance business, as I mentioned before, we are de-emphasizing this business.

This is where we perform maintenance on customers’ compressors.

This quarter it was only 2% of our total revenue.

It was 5% the full year 2005.

And we’re de-emphasizing, not totally getting out, but de-emphasizing for 3 reasons.

Primarily to use our skilled people for our rental compressors versus working on third party compressors.

It’s a lower margin business relative to rentals and there is very little opportunity to differentiate, it’s primarily a time and mileage commodity driven business.

From a balance sheet perspective, we have significantly strengthened our position.

Our secondary common stock offering closed in March of this year reaching over 2.8 million shares and netted over $47 million.

We used $5 million of that to reduce bank debt.

The balance of it goes to rental fleet expansion and associated capital, tools, service trucks, etc.

Our net interest expense was down and trending down.

The first quarter of ’05 it was $411,000, this quarter $360,000.

And this will continue as we continue to pay down debt and have offsetting interest from our large cash balance now.

Our cash was at $1.4 million the first quarter of last year. $42.4 million this quarter concerning proceeds from the offering

This year from the debt side, we have reduced it, as I say, $5 million.

We’re down to about $22 million debt not including any cash we would net against that.

We’ve also increased our line of credit from $2 million to $10 million as we announced a few months ago, and we recently dropped another half percent off the cost of our bank debt which will now be at prime and that will be taking effect here in the next 30 days or so.

From a field operations standpoint, the San Juan Basin of Northwest Mexico and the Barnett Shale of North Central Texas continue to be our most active areas.

Farmington, quarter to quarter, year to year, Q1 ’05 versus Q1 ’06 grew at 48%.

Bridgeport, which is the Barnett Shale area, grew 47%.

Those are probably the two hottest compressor plays in the nation so they are growing at very vigorous rates.

But all of our other areas combined grew at 33%, so certainly no slackers in the crowd.

Our expansion in the Rocky Mountains and Appalachian Basin are going well and we’re starting to place more equipment and service personnel into those areas.

We continue to see increasing labor, fuel and material costs in all of our products and we mitigate those fairly well ourselves by pricing them at each job.

We have lately instituted re-openers in these due to long leads for supplies and long deliveries Re-openers in the event of extraordinary equipment increases and labor increases.

For our compressor rentals, we’re staying ahead of those increases with rate sheet increases which is an increase on any new compressors going out on rental.

And then operating expense increases.

We had a rate sheet increase January 1 of this year that averaged a little over 6%.

We will have another one mid year in the 7 to 8% range.

We implemented an operating expense increase last year of about 5.5% in July of last year.

We will implement another operating expense increase mid year this year in the 7 to 9% range.

From a market perspective, first quarter this year was interesting, decreasing natural gas prices due to decreased consumption from coming off winter season, the warmest January on record, and high levels of storage.

It sounds like a dire situation, but as I just described, our business continued very strong through all of this.

If you start to think about what are the dynamics, why does all this sound counterintuitive?

And I think there’s just an anomaly between the short term mentality driven by spot prices and seasonal storage levels and the long term reality.

And that is that the demand supply situation in this country has not changed.

While they’re still declining at two to three times the rate they were 15 years ago, the demand in the U.S. continues to exceed supply.

Drilling is up but production is flat to down.

Canadian imports are declining and LNG is further away than everyone thought even a year ago.

Drilling and production are long term projects versus short term pricing.

It’s interesting that the volatility we see in natural gas prices anymore, we can vary a $1.50 to $2.00 in the price of natural gas from the time the well is spudded until it’s placed on line.

Of course, people don’t, producers don’t invest that way.

So these are long term projects meant for the longer term.

There were almost 200 more gas rigs at the end of April, 2006 versus April 2005, 17% higher The Energy Information Administration of the DOE just issued their report in the last couple days citing continuing concerns about long term natural gas supply.

The rates are hinting at gas price forecast for this year from 807 to 811 and sharp increases next year from 839 to 917.

So we’re still seeing some strength in the market going forward certainly.

Prices have been weak due to the solar season, but that’s always the case.

But if you look back when Imax prices May ’05 to May ’06, it’s about equal to a little bit higher.

So I think this market is going to go up every quarter We’ll get some adjustments, warm weather, economic cycles, but I do think the trend is permanently up and positive.

From a strategic standpoint, Natural Gas Services Group, we built some custom packages and numerous configurations in our custom fab and we’ll 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 on the small to medium horsepower, well head, non conventional natural gas compression market.

When you start to roll in the dynamics of the unconventional gas markets, the single largest component of gas supplied in the U.S. now, the fastest growing component of gas supply, nonconventional natural gas will account for 45% of the supply in the U.S. in the year 2030 which is 25% now.

And nonconventional natural gas wells are typically less prolific and produce lower pressure than conventional wells.

More wells have to be drilled to deliver equivalent volumes of gas and they need compression sooner and with greater frequency.

It’s a perfect situation for our company and the strategy we’ve set.

Our small to medium horsepower well head, unconventional natural gas pump is our sweet spot and our strong suit and it’s right where we ought to be.

Not only have we successfully participated in the growth of this market to this point, but this is exactly where the future is and our strategy is dead on and we’re executing very well.

Before I close, I want to make sure that I acknowledge all of our employees.

Our success is dependent on them and I personally want to thank every one of them.

That’s the end of my prepared remarks.

I’ll now open the lines up for anyone who might have any questions.

Thanks.

[OPERATOR INSTRUCTIONS].

Our first question comes from Neil Daneman from Pritchard Capital.

Please state your question.

Neil, are you there?

I’ll move to the second question.

Our next question comes from Mike Dickerman from Morgan Keegan.

Please state your question.

Hey, Steve, Mike Dickerman.

Hey, you added 55 compressors you said during the first quarter here.

Reiterated your previous guidance of a 30 to 40% fleet growth.

For you to hit that top number there, you’re probably going to have to add somewhere around 100 compressors a quarter.

Do you have the capacity to do that?

Well, as I mentioned, we’re going to accelerate that growth through the year.

I think our - - we added 55 Q1.

The number, I think the number was 171 or 177 we’ll have through July.

That puts us at 225 so that gives us another 4 or 5 months to finish out.

What we’ll start doing towards the second half is bring in some outsourcing that we’re in the process of contracting right now.

So we are approaching capacity pretty full where we are and that’s where we’re going to go out and bring in some other suppliers to help us.

Okay.

Are you seeing - - what kind of lead times are you seeing for like engines and other compressor components?

The engines and compressors we buy we can typically get them 12 to 16 weeks.

It just depends.

Actually the longer lead item is gas coolers and those are running probably about 4 weeks longer than the engines and compressors.

So we’re in a total build cycle of probably a 14 to 18 week average.

That’s on the rental side so you go after the fleet.

As I mentioned on the sales side through Tulsa we’re taking orders out a year from now.

Okay, so for the rental fleet, is it safe to say you’re already ordering these components I guess now for the back half of the year?

Yes.

Well, we’re into - - we’ve ordered everything through July/August, so we just keep running progressive months to keep our flow according to the backlog and what we need to go into the shops.

Okay.

What was your capital spending the first quarter?

First quarter capital was roughly $4 to $5 million.

In fact, we’ve stated before compression was going to be 25 to 30.

Okay, so you still think about that much?

I think it will.

It sort of depends on the mix as we go forward and that pretty well matches with the units we’ve added now, so I think we’ll be pretty well on track with that.

Okay, I think you hit pretty much everything else in your prepared remarks, so I’ll turn it back.

Our next question comes from Brian Pope from Pickering Energy Partners.

Please state your question.

Good morning, good afternoon.

Steve, just wondering if you could speak to kind of the average size of the compressor units?

I know you’re going to continue to focus on the small to medium sized units, but is that going to be kind of under the 200 horsepower per unit that you’re talking about in terms of your fleet expansion for the rental fleet?

Our average unit, rental unit size runs 105, 110 horsepower.

We will probably stay in that, maybe trend up just a little bit more.

But it will stay pretty much pretty close to that.

We’re getting more inquiries into the 200, 300 horsepower range.

So you might see a little increase, but nothing dramatic.

Okay, and does the Cap Ex per horsepower change much from the small to medium units or is it pretty constant?

And how do you think about it in terms of cap ex per horsepower add?

Well it actually gets a little less per horsepower as you go up.

But again, in the range we concentrate, which is the 50 to 500, you’re not going to see enough to be appreciable I don’t think in any dollar per horsepower sort of range.

You’ll get some incremental economies, but nothing really, nothing that would affect anything too much.

Okay, and then in terms of the basins where you’re most active, I mean, you mentioned the Barnett and the San Juan being the hottest basins.

Are you seeing any shift in operator interest in owning versus renting units?

And you mentioned your strategy is to grow the rental fleet, but are you getting - - I mean, is there a scenario where it just makes sense to for certain operators to go ahead and sell them their units as opposed to renting?

And how do you think about that tradeoff?

Well, I like the rental business.

That’s where we’re focused, that’s where the margins are for us.

That’s our expertise.

We’re not seeing any more inquiries from customers wanting tobuy versus rent than we have in the past.

The thing with rental is, it’s not just a straight economic tradeoff where well here’s the purchase price if I buy or if I rent I can pay it out over X months.

The added value to the rental is the service side and the run time and the response and the whole infrastructure that goes along with that.

So it’s not an easy calculation or easily seen sometimes.

So we’re not seeing too much change in that from the customers and again, we’re probably discouraging that more so now ourselves than we had in the past just because we don’t want - -we want to grow the fleet, we don’t want to be selling it off.

Okay, thanks.

[OPERATOR INSTRUCTIONS].

Our next question comes from Mike Dickerman for Morgan Keegan.

Please state your question.

Steve, a quick follow up here You commented that the backlog at SCS had grown from 27 million to 29 million.

What drove the incremental backlog?

Was it more units or higher prices on the incremental units?

Actually larger units.

Larger units?

Right, we’re getting some larger sizes in.

We will build and sell in Tulsa up to 1,500 horsepower nominally.

So we’ve seen a marked shift in some horsepower sizes that customers are ordering.

So that’s driving up - - the number of units didn’t change a whole lot, but the dollar per unit sold is.

Am I correct then to assume that the larger units also have a higher margin when you sell them?

Typically they do and I think that’s one thing we saw in this quarter’s 28% margin from that business.

Which is, I’ll point out, which is very, very high for the industry.

But do you think going forward with the new horsepower or larger horsepower compressors you’re seeing, will it be closer to the 28% going forward, or maybe closer to the 21% we saw in the fourth quarter?

I think we will get some of the larger horsepower and I think as we’ve seen it does carry some larger margins.

I’m hesitant to say that’s going to be the average through the year.

I’m still a little more comfortable with the lower 20% range than the higher 20%.

I think we had a great quarter and everything hit on all cylinders at the same time.

The business is still good, but I think we probably got an exceptional quarter here on those margins and even though we have some higher units coming out, they’re probably going to be spaced more through the quarters, too, versus any certain one.

We just had, just hit a home run this one.

Sounds great.

Thanks a lot, Steve.

Our next question comes from Neil Daneman from Pritchard Capital.

Please state your question.

Good afternoon, guys, let’s try this again.

Say, Steve, are you seeing much variance in your contracts regionally wise as far as Michigan versus Barnett and some of these others?

I mean, is there a reason to go after one area versus the other?

Hi, Neil.

There’s actually we like Farmington and San Juan just from the point of our infrastructure, our concentration, the economies we have in those areas due to the number of units we have out there.

We don’t have, we don’t really regionally price too much.

Michigan we have the same rough pricing as we have in some of these other areas.

So we don’t see too much difference in pricing across the company.

But more so just in, probably more so in our cost of operating in some of the areas.

With more units out, there are more people using some economies of scale.

Sure.

And then just lastly, given that like you said, the backlog and obviously the high utilization, are you seeing as far as - - you know, obviously these contracts are still very short contracts.

Is there any way to potentially lengthen the contracts or change the economics of those a little bit on that aspect?

Well, we typically put them out on 6 month rental terms.

We’ll go longer in some areas where we want to establish a base or if it’s maybe a little more custom type unit, we’ll go for 2 or 3 year contracts.

But we actually don’t push longer contracts.

The shorter ones fit the producer from the point that they like the flexibility and fits us from the point that we are able to better control our costs once they come out of minimum term.

We can get cost increases there to cover some of our operating expense increases.

So we’re happy with the 6 months as they go except when we get into the unusual situations I mentioned where we might want longer.

Right, okay, thanks.

That’s it, thanks guys.

Our next question comes from Sean Voight from Westsmith Capital Management.

Please state your question. .

Hi, it’s actually Sean from Westcliff.

Congratulations on the quarter.

Just a couple real quick questions.

On the compressors, can you just give us a feel on a year over year basis what do you think your all in cost is in terms of the delta versus last year on these compressors, the 55 compressors that you added?

Now you’re talking about what it costs us to build?

Correct.

I won’t go into a whole lot of detail on that just for competitive reasons.

But I can give you a scald on maybe some cost increases.

Well, let me give you just a little feel.

I’ll give you some averages.

Again, our average horsepower being say 105 to 110 in the rental fleet, average cost of that equipment running $55,000 to $60,000, in that range.

And that’s up about 5, 7% over the year.

So it’s really not up that bad so far?

Really where you’re getting - - you get the increase - - the engines and compressors are up about 10 plus, coolers about the same.

You mitigate that somewhat just through some businesses we’ve got and some of the other things, steel has flattened out and things like that.

Gotcha.

Okay, that’s great.

The other thing is, we’re what, about a year past the SCS acquisition.

You’ve reloaded on the balance sheet.

Are there other little fabrication facilities or maybe something smaller than SCS that you can think about picking up now?

I mean what kind of sizes if you are interested in anything out there?

Actually, any opportunity we’d look at from an acquisition standpoint would be leaning more towards rental than the fabrication.

Our long term strategy is there’s a good business there in Tulsa and SCS you can see by this quarter.

But the company’s strategy is to shift more towards rental.

So we’d be looking at anything in that realm and there’s nothing on the table.

We’d be looking at more of adding to the company from the rental side.

Now a lot of times you pick up some fabrication with that.

So we’ll certainly bring that along to increase the capacity.

But right now probably just pure fabrication - -

Okay, so at this point you’d just be looking to make a direct increase to the rental fleet?

Right.

Okay, and just last question, it looked like that deal got a little bigger than originally anticipated.

So all in, fully diluted, you’re at about 12 million shares?

Yes, I think 11.9.

Okay, great, thank you.

Our next question comes from Ralph Defayo from Investment Center.

Please state your question.

My question is I just downloaded the e-mail.

And the earnings per share, I see, were up 55% compared to this quarter last year My question is that this first quarter we had terrible gas prices compared to how they were not too long ago.

And of course the gas prices are very volatile.

My question is that if we return say this, as we go into next winter to these $15 per million BTU gas prices, how much of an effect does that have on your sales and bottom line?

And say it stays up at those kind of pricess or 12, 15, maybe a little higher compared to just staying say $7, $8 per million BTU?

It’s more of a long term effect than a short term effect.

We can’t - - the gas prices, as I mentioned a little in the remarks, the volatility of those is so extreme anymore that they fluctuate quite a bit just while we’re carrying on day to day business.

You get a spike up to 14, 15 like we did last winter, it doesn’t change our business.

We’ve got backlogs, we’re working through those and setting equipment.

On the longer term, it does certainly.

It backs things up a little longer and keeps things going a little more vibrant over a longer period.

Just as if on the opposite spectrum prices dropped to $5 and stayed there a while, they can - - right now you’re seeing what I think is, you see temporary changes in the gas prices that really producers and service companies like us, we certainly watch them and we try to stay aware and cognizant of what’s going on, but they really don’t effect the business on a day to day point because things are a little longer term.

Certainly with, you look at backlogs now and just what’s happening and what people can get, and youvre got to take a longer term view.

So whether it’s an extreme spike or some softening like we just came out of, that’s really not hitting people to where they’re making an immediate reaction.

They’ll watch it certainly, if you get this stuff for 2, 3 or 4 quarters, things would be different either on the high or the low side.

But right now it’s not a direct impact to us based on how the price, the gas price goes and what our business is that month.

But looking out say a year to two years, if we get $15 plus very sustainable gas prices going on average let’s say starting this fall to winter and staying up at those kind of prices, would you say it would have a substantially higher percentage increase at the bottom line as compared to say if prices are just stable say between $6 and $8 per million BTU?

In other words, with the 55%, would you expect it to jump up to like 75%, 100%, phones falling off the hook with things sustained at those prices?

Do you follow what I’m asking, Steve?

Right.

Well I would daresay probably the advantage would come from higher revenues at top line dragging that bottom line up more so than a tremendous bottom line increase and say some price increase and things like this because we are pretty fully priced.

We’re - - we don’t have to go out for double digit price increases to get what we need to do.

We’ve got our costs in good control.

And being a premium price provider right now, we’ve got good margins going, good, solid margins.

So we’re not going to get a whole lot more on the margin side.

Maybe 4, 5.

Right, but I was saying from the top line, the revenues with gas prices $15 sustainable.

I’m talking more long term.

Would that tend to drastically increase your end - - would you expect it to drastically increase your percentage revenues compared to the prior year because of those?

In other words, will that have a super substantial impact on your revenues, of course, following the bottom line with that sustainable sky-high gas prices?

Versus being flat, does it have that much of an effect on your kind of business?

If you get sustainable prices up in those double digit numbers, yes, it would have a pretty good impact because we’d be putting out more and more equipment.

Certainly at those prices, our prices become somewhat less sensitive to producers.

So you could get some pretty good change in that.

I think the key here is sustainable and that’s awful hard to predict and people commit money based on what they think will happen.

If we knew that would be happening, I think you’d get a tremendous lift.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS].

Our next question comes from Grant Zimmer from Mozama.

Please state your question. .

Hi, Steve, thanks for a good quarter.

Just a quick question back to the acquisition front.

Have you seen the weakness in natural gas in the short term change the valuation metrics of anything you might be looking at on the rental fleet side?

Well not really, because everybody’s busy.

Again, in spite of what the price has done, obviously we’re very busy and a lot of the people in the industry, the majority of the people in the industry are still very busy.

So as far as the valuation of what any potential acquisition might be, I don’t think we’re seeing any change in that really.

Okay, and as a final follow up on that, how do you think about those acquisitions?

What kind of valuation metrics drive your decision?

Cheap as possible?

Do you use a multiple of EBITDA?

Do you use - -?

Well, I think we look at a few things.

Certainly the EBITDA multiple.

Also, the thing we would want to look at from any rental acquisition we might evaluate is how it fits.

Certainly the finances have to work whether you look at EBITDA or multiples of any of that, but does that equipment fit into where we are?

I daresay I wouldn’t be out looking for a rental fleet that averages 1,000 horsepower.

That’s a total different change from where we are and we think we’ve got a good focus on a good growing market here and we want to fully exploit that which we only had 11% share last year, so we’ve still got a lot of upside.

So the fit becomes just as important because even if you get a good deal, on something that doesn’t fit long term, it doesn’t work out for you.

So not only the financials but really what’s the culture, what’s the fit, how are we going to make that thing work?

And is it in an area we want to be in?

Some areas there might be some good things going on, but it just doesn’t fit our strategy. .

Okay, thanks.

Thanks for a good quarter

Our next question comes from Michael Burns, Private Investor.

Please state your question.

Good afternoon, Steve.

I’d like to just follow up on the 11% number which we heard in the last call.

Could you give us a ballpark estimate as to what you think is the actual number of wells out there that would be not just eligible for compressors, but whether or not you would have to displace any of your competitors from providing compression to those wells.

Or how many wells are without compression in terms of what you would consider your potential market size?

Oh, shoot.

I think we see our growth potential from all those perspectives, just the organic growth within the industry, wells that mature, that need to put compression on at some point.

And then just taking away some share from some others and we’ve been able to participate in all those.

Actually more so the organic and the competitive arena than any maturation of wells.

I think the numbers I saw last year were 40,000, 50,000 wells drilled.

Right.

I’ve seen all those numbers and you get those from the Department of Energy and a variety of other places And I wondered if you had a better feel for how much of, how many of those wells were actually potential customers actually?

Or do they simply just kind of bleed away and it’s not really worth putting a compression on at a certain point?

Well some will but most of them need compression at some point in their life.

That’s a very hard number and it’s one I think those of us in the compression business have struggled with a long time, exactly what is the compression market?

It’s more of a guess, you know where the wells are.

The problem is, drilling is easy to tell, you have to call drilling permits, you don’t have to go get permits to put compressors on places.

So there’s really no simple place to get a handle on it.

We look at - - we belong to an industry group called the Gas Compressors Association which is the largest one.

But it doesn’t cover everybody, it’s a company subscribed group.

And we tend to use those numbers to get a feel for where we want to go and how well we’re doing and what’s happening.

Besides you start salesmen on the ground in different areas and the customers have seen what’s happening there.

One follow up.

Who would be the number two and number three behind you guys right now?

Do you have a feel for that?

Really just some smaller private companies.

We’re the only - - we’re the biggest public, I guess standalone company, in our market which is the small to medium well compression.

You get a lot of guys that are smaller than us that do like large horsepower and large horsepower is pretty popular right now which is great because it leaves us a lot of opportunity.

But, Mike, we just, as I mentioned before, we mainly compete on a regional level.

We’re about the only one with a good nationwide footprint but when we get in these areas - - I’m in Farmington right now, we get out in these areas, a lot of good competitors out here, but they’re more of a regional guy and really don’t get up to maybe the fleet size we do and aspire to be.

Well thank you very much.

[OPERATOR INSTRUCTIONS].

At this time, there are no further questions.

Okay.

I appreciate everybody joining us.

We look forward to seeing you in the next quarter and reporting in.

So thanks a lot.

This concludes today’s conference call.

Thank you for attending.