Natural Gas Services Group Inc (NGS) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group fourth quarter and year end earning release conference call. At this time, all participants are in a listen-only mode. [OPERATOR INSTRUCTIONS]. Your call leaders for today's call are Jim Drewitz, Investor and Press Relations Representative; and Steve Taylor, Chairman, President and CEO. I would now like the turn the call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

Good morning, all.

It is my pleasure to read the forward-looking statement, and let me get right to that. 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 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. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to, factors described in our most recent press release and under the caption of risk factors in the Company's annual report on Form 10-K filed with the Securities & Exchange Commission.

With that I would now like the turn the call over to Mr. Steve Taylor, Chairman, President, and CEO of Natural Gas Services Group. Steve?

Thanks, Jim. Good morning, and thank everyone for joining me for Natural Gas Services Group's fourth quarter and full year 2006 earnings review.

As you may have read in our earnings release this morning, we again reported a record year for revenue, net income, and earnings per share and experienced double-digit growth in all material financial measures. Just reviewing the annual highlights and looking at the comparative full years of 2006 versus 2005, our total revenue increased 27%, our net income increased 71%, and our diluted earnings per share was up 27%. We're obviously very pleased with these results, and I'll now review the details behind these highlights. Looking at our total revenue and comparing the fourth quarter of 2005 to the fourth quarter of 2006, total revenues were up 20% from $13.8 million to $16.6 million. Total revenues for the full year 2005 were $49.3 million, 2006 was $62.7 million, a 27% increase. Sequentially the third quarter of '06 total revenue was $17.1 million. Now, that declined to $16.6 million in the fourth quarter of '06, but if you recall, this was due to a one-time sale of $1.4 million in rental equipment in the third quarter of '06. Adjusting for this, total revenue rose $900,000 for a 6% quarter-to-quarter increase.

Looking at our gross margins and comparing the fourth quarter of '06 to the fourth quarter of '05, gross margin grew to $6.8 million which was 41% of revenue from $5.1 million which was 37% of revenue. It's a 37% increase in the comparative quarters in '05 versus '06. For the full year of '05 versus the full year of '06, gross margin grew from $17.9 million to $23.4 million, a yearly -- a year-over-year increase of 31%. Gross margin as a percent of revenue rose from 36% in the full year 2005 to 37% in the full year of 2006. Our sales, general and administrative expenses in the fourth quarter of '05 were $1.3 million, and increased 8% to $1.4 million in the fourth quarter of '06. For the full year comparison, they went up 8% also from $4.9 million to $5.3 million. Now, as a percent of revenue, they ran 9.9% of revenue in 2005, but they decreased to 8.4% of revenue in 2006. We implemented our SOX processes in 2006, and the majority of those expenses hit in the fourth quarter. They ran $198,000 in the fourth quarter. We had full year SOX implementation expenses in 2006 of $262,000, which equates to about $0.02 per share. Our stock option expense ran $376,000 for the full year of '06, which is about $0.03 a share. So for year-over-year comparison, that's a total of $0.05 per share against earnings that we didn't see in 2005.

Our net income after tax in the fourth quarter of 2005 was $1.4 million, and that rose 67% to $2.3 million in the fourth quarter of '06. The full year of 2006 we had net income of $7.6 million, which is a 71% increase from $4.4 million we reported in the full year of 2005. On a sequential quarterly basis, our net income declined from $2.4 million in the third quarter of '06 to $2.3 million in the fourth quarter of '06. Now, again, this is due to the one-time sale of 20 rental compressors in the third quarter. Without that sale, net income would have increased from $2.2 million in the third quarter of 2006 to $2.3 million in the fourth quarter of '06. Our earnings before interest, taxes, depreciation and amortization, or EBITDA, was $4 million in the fourth quarter of '05. It rose 45% to $5.7 million in the fourth quarter of '06. Full year 2005 EBITDA was $13.3 million. We experienced a 47% increase in the full year of 2006, up to $19.5 million. EBITDA as a percent of revenue for 2005 was 27%. It rose to 31% of revenue in the full year 2006, and we hit a record 35% EBITDA to revenue ratio in the fourth quarter of '06. And that compares against a 29% EBITDA to revenue margin that we saw in the fourth quarter of '05.

Fully diluted earnings per share for the fourth quarter of '06 were $0.19. This compares to $0.15 for the year ago equivalent fourth quarter of '05 which is a 27% increase. Full year 2006, our earnings per share is $0.66 compared to full year 2005 when it was $0.52, again the same 27% increase. Now, this is in spite of a 35% increase in our diluted share count in the comparative year periods. Earnings per share was down sequentially from the record $0.20 in the third quarter of '06 to $0.19 in the fourth quarter of '06, but, again, the third quarter of '06 was helped with the one-time sale I've already mentioned. As I've said before, earnings for the full year 2006 reflect a total expense of $638,000 or approximately $0.05 a share for SOX implementation and stock option expense that wasn't in last year's numbers.

Our balance sheet continues to be very strong. We renegotiated our bank lines in 2006 and combined three term loans into one and reamortized all over five years. We went from a variable prime based rate to a fixed interest rate, and we increased our line of credit from a one-year $10 million line to a two-year $40 million line, also at a fixed rate. As of December 31, 2006, our total debt, which is long-term debt, short-term debt, line of credit, and subordinated debt, was $18.4 million. This is a 53% reduction when compared to our $28.2 million total debt level at December 31, 2005. Our long-term debt only reduced from $20.2 million to $13 million during the same period. Cash and short-term investments grew from $3.3 million on December 31, '05, to $29.3 million on December 31, '06, and of course, that's primarily the result of the secondary offering we closed in March of 2006.

Now, looking at the different segments and comparing them, our total sales revenue, which includes compressor sales, flare sales, parts sales, rebuilds, and CiP compressor sales, grew from $8.2 million in the fourth quarter of '05 to $9.7 million in the fourth quarter of '06, which represents an 18% increase. For the comparable 12-month periods, total sales revenue grew from $30.3 million to $38.2 million, a 26% full year increase. Gross margin for total sales in the fourth quarter of '06 was 26% compared to 24% in the fourth quarter of '05 and 23% in the third quarter of '06. Compressor sales alone increased from $6.5 million in the fourth quarter of 2005 to $7.1 million in the fourth quarter of '06. That's a 9% increase, with the gross margin in the same period increasing from 20% to 21%. For the comparable full year periods, compressor sales, not including the one-time sale of 50 rental units in the second and third quarters in '06, full year 2005 revenues grew from $21.4 million to $26.8 million in the full year 2006, which is a 25% increase. Now, if we include those 50 units we sold, full year 2006 compressor sales of $30.9 million, a 44% increase. And gross margin for 2006 was 17% on our compressor sales.

Sequentially, and eliminating the one-time revenue gain of $1.4 million for third quarter rental unit sales, compressor sales decreased from $7.5 million in the third quarter of '06 to $7.1 million in the fourth quarter of '06. However, the current compressor backlog at our SCS subsidiary in Tulsa totals approximately $26 million currently and is booked into October 2007. This compares to the $17 million backlog which was booked out through May of '07 that I mentioned in the last earnings call last quarter. Let me again remind everyone that the sales component of our business is variable on a quarterly basis. It depends on the product mix going through the plants, associated margins, customer dictated schedules, and fabricating time, which all combine to cause that unpredictability. So our sales results should be viewed on a rolling trend and not an individual quarterly basis.

The balance of our sales revenue, which is flares, parts, rebuilds, and CiP compressors, was $1.7 million in the fourth quarter of '05 and $2.6 million in the fourth quarter of '06, a 53% increase. But we did have a revenue decrease from $8.9 million for full year 2005 down to $7.3 million for full year 2006. This yearly revenue decrease was primarily due to lower parts sales, which go hand-in-hand with the lower sales -- service and maintenance revenue we also experienced, which I'll review in a bit. Composite gross margins for this revenue component typically run between 40 and 50%, depending on the mix.

Our compressor rental revenue continues to grow at a very strong rate. In the fourth quarter of 2006 revenue was $6.6 million compared to the fourth quarter of '05 when it was $4.9 million, a 35% increase. Full year 2006 we had compressor rental revenue of $23.5 million compared to full year '05 of $16.6 million which is a year-to-year increase of 42%. Rental gross margin as a percent of revenue in the fourth quarter of '06 was 63%. That's higher than the 60% we experienced in the fourth quarter of '05. Full year gross margins increased to 62% in 2006 compared to 61% in 2005. We added 59 compressor units to our rental fleet in the fourth quarter of '06 and had a net addition of 246 to the fleet in the full year 2006. We expected to add 250 to 350 units to the fleet this year and ended up net at the low end of that range. But when you add back in the 50 rental units we sold in the second and third quarter of 2006, we grossed about 300 units fabricated and placed or replaced into the fleet, right in the middle of our predicted range. Although we added 34 less units in 2006 than 2005, the fleet horsepower addition was essentially the same. Our fleet average horsepower is now running 116-horsepower, and the incremental horsepower we added in 2006 is actually running about 130-horsepower per unit average. We ended the year at a compressor unit utilization rate of 88%.

On the service and maintenance business we have deemphasized that business in 2006 as we have discussed before, and revenue fell from $2.4 million in '05 to $1 million in 2006, and is running at a gross margin of 25% in 2006. Again, this is part of the -- this is part of the part sales decline that I mentioned earlier that we've seen, too. For our compressor rental fleet, we implemented two price increases in 2006. Now, in 2007 we -- we will see continuing pressure on labor rates and salaries, along with some price increases in major components. We will need to adjust rates, though it will likely be on a more selective basis than in the past. We'll look at specific unit models, particular operating geographies, and specific areas like that when we consider price increases.

Now, summarizing, our 2006 results are obviously gratifying. We have weathered high natural gas storage levels and low natural gas prices in 2006 and have been able to prosper and thrive. The focus market we serve, which is the small- to medium-horsepower well head unconventional gas rental compression market, continues to be a growing area that is, we think, underserved by a nationwide organization other than us. I spent a lot of time the first two months of the year out in the field talking to customers and employees, and I'm very encouraged with what I've seen and heard. The Energy Information Administration of the DOE predicts natural gas consumption to increase 2.7% in 2007, with average Henry Hub prices being $7.10 in 2007, rising to $7.60 in 2008. That compares to the 2006 average of $6.90.

Standard & Poor's just issued a report entitled the top 10 trends in global oil and gas for 2007 and found that growing domestic demand, limited availability of LNG imports, and steeper decline curves will help sustain high natural gas prices. An El Paso Corporation executive at a recent conference stated that, quote, North America's natural gas markets will continue to be supply constrained for the next several years which should result in strong prices for exploration growth and growing dependence on LNG, unquote. He also said that, quote, over the past ten years the U.S. has not been able to grow its gas volumes at all, unquote. And that El Paso expects that gas demand will rise faster than supply. LNG will become an ever-important domestic gas source by the year 2015, but because the rest of the world will also be competing for those supplies, that bodes well for natural gas prices in North America.

Now, to quote myself, overall I could be wrong, but I think the first half of this year will be a little choppy. We're coming off a second warm winter, we're going into the shoulder season, and weather projections see a mild summer. Although I think we will still show growth through it, the last half of the year should ramp up nicely, and overall we expect 2007 to be another good year for NGS. We intent to aggressively address the market and are strengthening our sales and field presence to do that. Our customers continue to drill and produce natural gas in our primary markets, and market indicators continue to be positive.

Looking at the past two years, comparing our numbers on December 31, 2004, to December 31, 2006, we have quadrupled [pull to] revenue, we've almost doubled the rental fleet and increased rental revenue by 124%, we've increased EBITDA by almost $12 million or 150%, and we've tripled our total assets and increased shareholders' equity by 4.5 times. Our market cap has gone from 74 million to $160 million, and we are the strongest financially [than] we have ever been. I think we have demonstrated the momentum and solid value of our small to medium horsepower well head compression franchise.

Before I close, I want to make sure that I recognize all of our employees. I get to take an hour every quarter and report our results, but we're in a very competitive market with a scarcity of experienced people, and it takes a lot of work and dedication to get these numbers to the table. Our employees are the ones that make it happen, and I want to make sure they know it's appreciated.

That's the end of my remarks, and I'll turn it back to Stephanie to open up for any questions. Thank you.

[OPERATOR INSTRUCTIONS]. Neal Dingmann.

Good morning, Steve.

Hi, Neil.

Hey, say, you mentioned just a little bit on the compressor utilization. Is there anything that you can do specifically to work on that? Is that -- or is that more just sort of market conditions, whatever? I mean, I'm just wondering, is it as you're moving compressors from job to job or what can you do to try to improve that?

Well, the desired rate we would like would be low 90's -- 90, 91, 92 -- things like that, but we've made a decision and since we made it probably mid-last year to -- you can always cut back on fabrication some to adjust that, too, somewhat, and we adjust that [2] a bit, but we're still building through it, and I'm not too concerned about that level right now. We've actually seen a little strengthening of it here lately, and like I mentioned, I think '07 is going to take care of that pretty well. We're seeing -- we're seeing good -- still good market plans and reception and we're moving into some new areas, so there's a lot of ways you can do it. Of course, you can cut price and get them out there. We don't want to do that. You can slow down the fabrication to a degree of where you won't be able to react when the markets do turn up like we think they will a bit, so we're just -- we've just made the decision to kind of mush through it a bit, keep building at a steady level and be able to put them out, so I fully expect we'll be up into the 90 -- low 90's throughout the year, but right now we're just going to kind of keep -- keep pushing through there and then, like I say, emphasize probably the sales side a little more to get it up a little higher.

Okay. Okay. And you mentioned some of the potential pricing increases you might selectively put in there. Is that something you'll do here very shortly or is that something you'd kind of would look at the market for awhile first to decide?

No. We'll do something here pretty quick.

Okay.

And then we'll watch it a bit, and then see how the rest of the year goes. We've already seen some of the price increases, and just to -- probably just to recover some of those we'll have to do something here in the next 30, 45 days.

Okay. And then last question. Sort of looking at the various regions, kind of I've guessed asked around this in the past. Are there -- obviously the Rockies are always pretty pricing sensitive. What about some of your other regions? Specifically, I'm wondering like on Michigan and some of these areas, number one, just in general how pricing sensitive or at least to your business have you seen in the past? And then have you seen anything recently as far as, it seems, with prices coming back a little bit? Have you seen any noticeable difference in some of these regions?

It's the same as what it has been, improve on what we saw in '06, Farmington, San Juan Basin, Four Corners area continues to be the most sensitive to pricing just because of their pipeline differentials and their well head price tends to run below anybody else in the other areas we operate in, so that's -- that's where we've seen it in the past and that's where I expect we'll see it in the future. As far as other areas, they seem to be just holding in there just fine, and really no -- no change as far as any activity or anything else we see. All of our areas have grown net in '06 by -- through the addition of net compression, so we're -- we see some of it. It gives us some marginal impact in some areas. In some areas we don't see it at all, and you really couldn't tell there's any price fluctuation.

Okay. Okay. Perfect. Thanks, Steve.

Okay. Thanks.

Shawn Boyd, Westcliff Capital Management.

Good morning, Steve. How you doing?

Good, Sean. You?

Good. A couple questions for you. On the -- your thought that we might see it being a little choppy first half, that certainly makes sense. But I was just wondering when we think about how that comes into the business, and specifically on the rental side, if we're thinking about units and -- additional units, a little over 300 maybe for the year, should we -- can we talk about how that would come on, I mean, given your outlook? How you think -- would they be coming on lower in the first two quarters and then higher in the back half, or would they still be fairly linear? How should we think about that?

I think that's exactly right. If you take a time line and draw in '06 and '07, you can see -- I think '07's just going to be a turn around of '06. '06 started off high, it kind of trailed off with gas pricing, storage, et cetera. I think we're continuing that low point in trail, but I think it'll -- it'll increase towards the last half of the year, so I think that's exactly it. We'll see -- we'll see a back end loaded this year more so than when it was front end loaded in '06.

Okay. And so -- and just to be -- make sure I got my numbers right, so you said you added 59 units in the fourth quarter?

Yes.

So you went out with 1,111?

Yes.

Okay. A couple other small things. The backlog on the compressor sales jumping up, you said went from 17 million to 26 million.

Correct.

Does that -- what's the way to put that -- I guess, what we just talked about what we might see in unit growth on the rental fleet. All I'm trying to see here is that would be incremental to -- in other words, that's not going to impact your plan on the unit growth of the rental fleet?

No. No. Those are separate -- essentially separate businesses within the business.

Okay.

They run independently.

And on the gross margin, congratulations. I mean, it's really coming in great here, and the strength across the board is interesting, specifically, up here in the 63% range on the rental side. I know we're always shooting for 60, but I'm just wondering if maybe we've hit kind of a new level and can hold the 62, 63%? Not trying to pin you down or anything, Steve.

Do what?

I am not trying to pin you down or anything.

Well, I get this question every once in awhile. It's -- our target area's 61, 62%. We've had a real good -- real good efforts by everybody last half of the year and it's shown there. I think I would still say we're aiming for those areas, and I think we'll get some pickup. Again, when we look at a back end loaded year, we may have -- those margins may be a little more lower the first half then ramp up the second half, too, so on the yearly basis just like we showed, I think what 62% over the year, in '06 and 61 in '05. It's a very good margin. It's fully absorbed margin. We take all of the costs into that. So I think that's -- that's where we're going to aim, and if we can get above that, boy, it just makes everybody happy.

Okay. All right. Fair enough. And then within that backlog on the sales side, you're running, shoot, 25%-ish gross margin past couple quarters on those. Is your backlog telling you similar margin on that forward business going into '07?

Yes. What we're seeing so far, that still looks good. And part of that margin is -- part of that is about -- it varies quarter-to-quarter. 75 to 80% of that sales is the custom fab sales up in Tulsa and the other 20% or so is the other components in there I mentioned, flares and CiP frames, and things like that. So you get some variance in there, but we're really -- I think if you remember back in the second quarter where we had a pretty low margin in that business, we really made a concerted effort and really had to hand it to the guys in Tulsa for really working that pricing and getting those things back up to where we have historically wanted to get. And some of our -- some of our low price in the second quarter was due to a lot of small units coming through, but I also mentioned that we wanted to try to get away from -- we get variability in that business anyway. We wanted to try to limit or mitigate the variability due to size going through there from a margin standpoint, so they've done a hell of a good job in doing that, and it's showing up.

Got it. Very good. All right. Just one other thing just to clarify. The Sarbanes-Oxley expense you said was 198,000 in the fourth quarter?

Yes.

And -- so the bulk of it was -- so -- and for the year it was 262?

Yes.

Okay. So the bulk hit the fourth quarter.

Right.

And then options --

Because the deadline was December 31.

Got it. Bringing it in at the end of the -- right at the wire, right? So the -- on the options expense, 376 for the year and what was that for the quarter?

Take it just about -- it's just about even throughout the -- throughout year, so probably about 80, $90,000.

Got it. Great. Thanks a lot, Steve. I'll jump back in the queue.

Okay, Shawn.

[Brad Langston], [Samlan Capital].

Hi, Steve. Congrats on a record year.

Yes. Thanks, Brad.

Hey, no problem. I just wanted to -- to get a better handle on a couple things. I just have a few questions quickly. How many compressors are you guys planning to add in '07 on the rental side of the fleet?

Well, we're going -- we're going to try to keep it about the same range. I mean, I'm going to probably -- I'm going to say that 250 to 300 is what we're going to shoot for.

Okay. Okay. And then -- and to an earlier question, that's all incremental, so you guys have capacity to add incremental on top of that build out in backlog on the sales side? Is that correct?

Oh, on the sales side or the rental side?

Well, your capacity -- so your fabrication capacity, right? That increase in backlog takes into account the existing capacity. There's no new capacity needed to take that -- to take on the build in the sales side, right?

Yes. Well, that backlog, that 26 million is strictly custom fabricated compressors for sale, doesn't have any of the rental -- rental projection in there.

Perfect.

So -- and yes. We're -- that's out to October. So obviously there's a little more there we can fill in, and the 250 to 350 we're looking at -- or 250 to 300 we're looking at this year on the rental side, if things really pick up we can press and we did a little outsourcing in '06 to bring on some additional units. We could go back and do that, too, if we need to. We got some up side we can do if the market demands.

And the second question on that, on your backlog, I know we were -- the previous person asked the question about margins there. What is the embedded margin in the backlog?

It's -- it's going to be running right in the 20, 21%.

20, 21%? Okay.

Which is our historical number we've aimed for.

Okay. And then these are sort of more high level questions, but what are you seeing right now in the low horsepower market? Some of -- some of your competitors have come out saying that the low horsepower market's been a little bit tough in the past few months. Are you seeing any of your low horsepower stuff being returned? Is there anything laying idle that's abnormal?

Well, nothing abnormal. I mean, on the rental side, you always get your equipment going in and going out and things like this. Probably the -- I've listened to those same calls, and I think there's -- we work in the same market, but we see some different dynamics in some of that. We're -- we feel like we're pretty fully priced in our product and not having to really catch up on any of that, and - which I think has caused some of their problems on the low horsepower, so I think we're pretty good.

The main thing is that's our focus, that's our strategy, and that's where we concentrate, and so I think we've positioned ourselves very well from that point. We -- it's funny. You even get -- and this is a function of the market and really the historically high pricing now. You even get -- we get displaced even our smallest unit is about 50-horsepower. We get displaced even sometimes by 20-horsepower units. So people are even going down lower, and that's kind of where we cut it off below 50 we don't feel like we can be very -- if we could be competitive, we wouldn't make the margins we want to make. So you get the dynamics into play, and no matter where you are, it's just where your strategy is and how you sit.

Okay. Another question for you is they also mentioned -- your competitors mentioned that they were going to be raising prices specifically, they mentioned on the low horsepower side. You mentioned that you're going to be selective in how you're pushing price. I mean, doesn't that sort of raise the bar on the overall pricing when the big behemoths are taking up their prices on the low horsepower side?

Not -- well, it doesn't raise the bar or provide shelter, one or the other, I guess. I'm all for them raising prices. It's -- again, I think our prices kept up over time. Our focus is on the low horsepower, so we've never really had low pricing on that stuff, and I'm not privy to their pricing, but we're -- we've -- our price increases have been I think fairly reasonable and nominal compared to everybody else because we -- like I say, we haven't played catch-up. We've just kind of stayed up with it each year, and we've -- we do a couple price increases a year in the past, and that's how we've done it.

Okay. Okay. And then is the merger of Universal and Hanover going to provide interesting opportunities for you guys? I mean, it seems like it could be an opportunity to acquire some compressors. If there are any antitrust issues in certain geographies, they may have to sell assets. And secondly, I mean, acquiring personnel. I mean, have you guys seen anything like that?

Well, I think any time two large companies go together, there's always -- there's always displacement and nervousness and things like this, and we're going to be on our toes and aware and keeping our eyes and ears open for opportunities thaas they present themselves. I think it's probably a little too early in their process to see where that might be, but I think there are avenues for us to -- not necessarily in direct talks with them but just in the marketplace to make some inroads.

And how about the acquisition market right now? Are you seeing -- I know when you've been asked about this previously, it's been a tough market as valuations are pretty high, but what are you seeing in the valuation market right now in terms of doing acquisitions?

Well, they're still a little high, but I think -- we're actively looking, and we'll see what things come out. It may take a little more of innovative structures to do some things. In a situation like that, I mean, you got to be careful about overpaying and getting into areas you want to be in, in that situation, but I think there's -- there seems to be always more than one way to strike a deal. We don't have anything -- any current serious discussions going on anywhere, but I think it'll be -- I think there are opportunities out there in '07 to do some of that, and I think we're try to look at them.

Great. Last question. Any thoughts on the MLP structure and if that kind of thing makes sense for you guys at this stage in the game?

Yes. I don't think it makes sense for us. I think we're more of a -- the MLP tends to lend itself to a more mature growth income producing sort of situation, and as our numbers show, we're still growing quite vigorously. Our -- our shareholders will get their -- get a, in our opinion, a higher return just from equity appreciation than they would from income distribution with us.

Okay. Okay. Well, great. That's all I have. Thanks, Steve. Congrats again.

Good to talk to you.

Mike Drickamer, Morgan Keegan.

Good morning, Steve.

Hi, Mike.

He just took my question on acquisitions, so. Steve, if you look at your fleet you added -- and what you added in 2006, what is the average horsepower in the fleet right now of the compressors?

At the end of '06, it's 116-horsepower among all the units, and what -- the units we added in '06 actually came out higher at 130-horsepower per unit average. So incrementally it's going up.

Okay. If you were to build a 100-horsepower compressor right now, what would your costs be to do that?

It's -- average cost on that unit would be around 65,000.

Okay. So the costs have gone up, kind of justifying perhaps a little bit higher valuation then also?

Yes. They've -- well, yes. They're still going up. They're -- we're seeing 10% increases -- blended increases in package costs.

Okay. And then on the sales side, you may have hit this already and I missed it, but what is your lead time for components? And I know that lead time had been decreasing, but where does it stand right now?

It's still about the same as what it's been the last, say, six or nine months. Probably engine compressors, we're into the three to four-month thing and coolers probably the four to five-month situation. So it's about the same as it has been the last half.

Right. Thanks a lot, Steve. That's all I have.

Okay, Mike. Good talking to you.

Jeffrey Kerr, Kerr Financial Group.

Good morning, Steve.

Hi, Jeffrey. How are you?

I'm doing okay. How are you?

Good.

Question on the rental fleet as you see it going out in '07. Do you see further penetration into the current markets, or do you foresee expansion into some new markets or some peripheral markets?

Yes, I think both. We're still growing quite well in the markets we're in. In fact, Barnett Shale just continues to amaze us and everybody, I think, just the amount of activity and the growth potential out there. So we still see a lot of opportunities in -- where we are in San Juan Basin, Barnett. Michigan is up 20, 30% in compressor count over last year. I mean, that's an area that's been mature and everybody wrote off a long time ago, so the areas we're in we still see a lot of opportunity and a lot of growth. We're bringing in new customers in these areas all the time.

And in the areas we move into newly, Appalachia and the northern Rockies, we're seeing opportunities continue there. And then we're looking at newer areas here. We're very interested in east Texas, Arkoma, Fayetteville, Shale, areas like that. So I think there's -- as I mentioned, it's been actually pretty good couple months just getting around and talking to everybody and seeing what everybody's doing, and some of the new customers we're bringing in.

Okay. So do you foresee having to adjust -- will there be an upward adjustment in the maintenance costs as you put new staff on for maintenance, or is that about the same?

Well, we might see a little uptick in that. I'm hoping -- it just depends on how big -- if we move into a brand new area those tend to be more cost driven initially [to keep] revenue up, but if our growth tends to be in established areas, areas we moved into last year or so, we probably won't see too much of it. So I'm hoping that we're getting to the size now that we can start absorbing more of that without it being real apparent.

Okay.

And just go ahead and grow that way.

Do you think -- like the east Texas example, depending on how that grows, that could be like an area where you need to add some -- incremental costs might go up on the maintenance side?

It could, right, because we're not there, and so if we look at -- and, again, just kind of throwing all of those together, from the east Texas, Arkoma, Arkansas area, right. If we get in there and start putting equipment in, we don't have people close enough -- we have people 100, 150 miles away, but have you to have them closer, so --

Right.

Yes. We'll get some incremental costs in there, but, again, hopefully the fleet's big enough now overall we'd see certainly increased costs right there. You probably wouldn't see it because we don't break it down by geography, so from a fleet standpoint, we're hoping to just -- we're able to cover it okay.

Right. Okay. Okay. And my second question is talking about acquisitions and the valuations of what you've seen out there, any thought on buying some of your own stock back? I think it's pretty low priced, low valuation.

I agree it's low priced.

And low valuation.

Yes. Exactly. Have you ever met a CEO that's not misunderstood and doesn't think his stock's not valued right?

[Laughter]. Not yet.

But no. From a stock buyback, we're not really thinking about that. The cash we have on the balance sheet, again, is to continue to expand the rental fleet and put it out there, and I'm -- I think again we can provide better return by putting that cash to work on these 60% margin projects than buying back stock that way.

Okay. So then if you are -- if you do find a deal to be done, likely going to be financed with either the line of credit or debt [owe] or something like that, I guess, right?

Well, it's -- and again, I think you may have to get creative on some of these things. It could be a combination of any of that stuff. We're set up fine with the bank, we could do cash, debt, stock, or some variation thereof.

Yes. Okay. Okay. It's a great quarter. Thank you very much.

Good. Thanks, Jeff.

[OPERATOR INSTRUCTIONS]. Shawn Boyd, Westcliff Capital Management.

Steve, just coming back on two things, and then I promise I'll go away.

That's all right.

On the operating expenses. Given -- things are kind of calming down a bit out there. What should we think about next year in terms of leverage on the operating expenses on the SG&A? Well, let me just leave it at that.

Okay. From an SG&A standpoint?

That's right.

We'll probably see, as you saw, we -- as a percent of revenue we've come down appreciably in that area. '07, it might actually uptick a bit from a percent of revenue standpoint. We -- as I mentioned, we're really wanting to beef up in some areas. There's going to be some management areas, and some support areas that we really want to probably bring in some more people and get situated a little better in some of those situations, so I would say we'll see as a percent of revenue a little increase in that. It's not going to be extraordinary, I don't think, because hopefully we'll keep the revenue growing, so that the percentage stays in check. In our -- I think we're, what, 8.4% of revenue, which is peer-wise pretty low percentage, so we're wanting to get the bench built up a bit more, and we'll invest in people that way.

Got it. And in terms of that investment, that's going to be more on the distribution side, on the sales?

I think it'll be a little of -- it'll be some -- some management, some sales, and then some back office support. I think the whole business is growing as you can see by the numbers, so we're just going to have to grow a bit with it.

Is that going to stairstep you up in terms of your kind of total revenue capacity?

Well, yes, certainly from the sales side it will.

All right. And the other number, did I miss it, maybe, but CapEx for next year?

No, you didn't miss it. I didn't throw it out there. Probably we're projecting in the 20 -- 20 million plus or minus. I'd say 20 to 25 million range, just depending on how many units we add and, again, what the horsepower ends up being. As you notice the horsepower this -- in '06, incremental horsepower ran about 10 to 15% higher than what we were normally seeing, so it'll depend on the mix we see going forward in that, but I think 20, 25 would be a good, round number.

Got it. Good enough. Thanks, Steve. Way to go in the quarter.

Thanks.

[Dan Orr], [Valusnee Capital Management].

Hi, guys. Congratulations on a good quarter here.

Thanks, Dan.

Well, I guess my first question is -- is kind of big picture. Can you help us get a better understanding of what markets you're looking to get into in terms of new states? And also I guess a follow-up to that would be does it make sense to grow organically or to buy into the market?

I think our prime areas of interest are -- and as opposed to states I'll just throw out basins is how we tend to look at it. Again, we're -- the ones we moved into recently have been the Appalachia area, mainly Pennsylvania, West Virginia, and moving up into the northern Rockies from Farmington up into Colorado, Utah, Wyoming area up there. As far as any new areas, again, we will be looking actively and seriously in the north Texas, east Texas, Arkoma area, up in there. There's a lot of work going on up there, and we really haven't even approached it.

So those areas right there in addition to our existing areas we think will provide a lot of opportunity just to get us through '07. As far as whether it's a buy or a build situation, we've demonstrated we can do either one well. I think -- again, it depends on the opportunities that come along. If, for example, we find an opportunity in an area we just -- had just moved into and we feel like it's a good situation where we might be able to get to a higher mass or critical mass much quicker with an acquisition than with organic growth, we'll look at that. If we're in an area like one of our big areas like, say, a Barnett Shale or something like that, an acquisition probably doesn't make too much sense. We've got a good market share, we've got most of the customers covered, and we'll just grow it organically there. So, again, it's just fairly opportunistic as to what presents itself.

Okay. Great. And for these new markets, it's obviously a rather fragmented industry. What's the target acquisition size that you'd be comfortable doing?

Well, I don't know. There's really not -- I guess in the conversations we've had with people that might provide funds in the event of anything like that have always said, gee, if the numbers look good, just tell us how much you need. So -- and I think that's -- that's what it tends to be. Of course, I don't think we're talking about a $1 billion deal or anything like that. But, again, if we see something looks good from a strategic standpoint getting into an area we want, the kind of compression we like, and then if the numbers look good, I think it's easy enough to make those deals happen fairly irrespective of the size.

Sure. And since Universal did the MLP, it seems like a lot of the private guys, their expectations are going up. Is that the same for the lower horsepower stuff you'd be looking at?

I don't think the expectation is lower horsepower due to the MLP. Probably -- they're probably just expectations due to the market. I think those have come off just a little bit and I've seen some people on the market maybe a little longer than I would have thought. So I think there may be a little mitigation to some of that, but again, people get pretty proud of what they've built and rightfully so, and they want a pretty good price on them sometimes. And you just have to kind of look at them and see what -- number one is it -- from an asset standpoint does that make sense, and from a strategic or synergistic standpoint does it make sense, too. So maybe I'm dancing around that question because there's not any real good hard answer to it, it just kind of depends on what we see.

Okay. Sure. Then last question for you, what type of debt to cap would you be comfortable with?

We ran before -- a couple years ago about 50%, and I know our public peers run about that. That's about the highest I'd want to get. I think the thing we have to remember, and we're -- some people will call us underleveraged a little, but I think you have to remember this is a very volatile business. It -- we've had ups here the last two or three years, and we think it'll continue on here for a bit. But this is a market that can level off and do some different things, so don't want to get too far out there. I think we could -- we could handle a lot more than what we've -- excuse me, than what we've got right now, and with the right deal we could go up to about a 50% level.

Okay. Great. Well, thanks a lot, guys. Appreciate it and congrats again.

Thanks.

[Shami Nevi], investor.

Steve, this is Shami. Good morning.

Good morning.

I'm an independent investor who wanted to just talk. You have been turning in good earnings, but the stock market doesn't seem to react too positively. What do you think about that?

Are you talking about generally or specifically?

Just -- in -- the past year. I mean, you have been throwing out good earnings, but the stock has been on a down trend, and what do you say about that?

Well --

The public hasn't been responding to it in a positive way, although you have been throwing out good earnings.

Right. Right. Well, and there you hit upon the typical management frustration, I guess.

Yes, right.

I think we get -- I think we get caught up in just the general energy wave in a lot of respects. We're not a huge player in the market, and when energy falls out of favor to some degree or there's some rotation out of that sector, I think we get caught up in the wave and get washed along with it. So not a whole lot we can do about that except just continue to post the numbers we think we should and grow like we think we can and hopefully long-term the value becomes apparent.

Is there a way you can make your company be noticed by the public?

Probably no more than what we're doing. Again, just -- we're quite active in talking with investors and getting out and seeing them, and again, I think just putting out the right numbers on this thing is the best place to display the value of the Company.

Yes. I hope in the future there will be a demand for this stock, and depending on what you're throwing out there that people will want to buy this stock, and the value will appreciate.

Well, thanks, Shami. We appreciate you being an investor.

Thank you. Okay.

Thanks.

[Arnold Newton], [Arnco Incorporated].

Congratulations, guys, on a good quarter and a good year.

Thanks.

Steve, I was wondering what percent of the natural gas compression business do you have within your class of horsepower? What percent of the business do you have?

Well, through -- right now we run about 11 to 11.5% of market share, and that's defined in the 50- to 500-horsepower in the states we operate in, New Mexico, Colorado, Texas, things like that.

Okay. Could you comment on your screw compressor business? What percent that business -- of your total business is that screw compressor business?

Now, are you talking about screw compression systems up in Tulsa, or are you talking about just the generic rotary screw type compressors we use?

The one that you -- I think you purchased one, what, last year --

Right. Okay. Yes, that's Screw Compressor Systems up in Tulsa.

Right.

It's -- well, as you can see from the numbers, the [capacity of that] business has grown quite well. The margins are holding up quite well, and our margins in that business, as I mentioned before, when they run in the 20's, the low 20's, that is industry wide a very high margin. Peers typically will run 10 to 12%, maybe 15% in a good quarter, good year, so it's a very good business for us. Those guys have done a great job putting a group through there and getting that done. So from a -- it's hard to get a market share piece of that business itself. There's not any real readily available data on that, and primarily because you so many -- you talk about rental being fragmented. Fabricating business is even more so. There's hundreds of small- to medium-sized fabricators out there we just can't get a handle on.

Looks like the trend of your rental business is -- is really trending up, and that's good. I'm glad to see you're coming here in our state, Arkansas, and with a [federal] shale coming on. Having been in the equipment rental business for years -- out of it now, but that's a good business, and congratulations to you. That's all I had.

Thanks. Appreciate it. Thanks for investing.

Yes, thank you.

[OPERATOR INSTRUCTIONS]. At this time we have no further questions.

Steve, do you want to close it off?

Sure. Well, Stephanie, thanks for your help and, Jim, for yours, and I appreciate everybody that's dialed in and called, and we look forward to getting a good start here to the year and talking to you in about three months. Thanks again.

Very much.

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