Natural Gas Services Group Inc (NGS) 2007 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 financial results 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 to turn the call over to Mr.

Jim Drewitz.

Mr.

Drewitz, you may begin.

Thank you very much, Ross.

Good morning, everyone.

It is my honor to read the forward-looking statement.

So 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 safe (sic), 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 update such forward-looking statements to reflect subsequent events or circumstances.

Important factors that can cause actual results to differ materially from expectations reflected in the forward-looking statements include, but are not limited to, factors described in our recent press release and under the caption "Risk Factors" in the company's annual report on form 10K filed with the Securities and Exchange Commission.

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

Steve, it's all yours.

Okay.

Thanks, Jim.

Thanks, Ross.

And good morning to everyone else and thank you for joining me for Natural Gas Services Group's fourth quarter and full-year 2007 earnings review.

If you were able to review our earnings that were released this morning, we again had a very good quarter, as you could see, and ended the year with excellent results.

Whether we look at comparative fourth quarters or the full years of 2006 versus 2007, we had double-digit percentage increases in all of our primary financial indicators.

For the comparative year-over-year quarters, our diluted earnings per share were up 58%, our net income was up 56%, EBITDA was up 27%, and total revenue was up 18%.

For the 12-month comparison, diluted earnings per share rose 53%, net income was up 62%, EBITDA was up 40% and total revenue rose 16%.

Now looking at total revenue and comparing the fourth quarter of '07 to the fourth quarter of '06, total revenues were up 18%, from $16.6 million up to $19.5 million.

Sequentially, total revenues rose 5% from the third quarter of '07 to the fourth quarter of '07, from $18.7 million up to $19.5 million.

And for the full-year comparison, total revenues rose 16%.

Comparing the fourth quarter of '07 gross margins to the fourth quarter of '06, they grew from $8.6 million -- or grew to $8.6 million, or 44% of revenue, up from $6.8 million, or 41% of revenue, a 26% increase.

In sequential quarters, gross margin increased from $8.5 million up to $8.6 million.

Comparing the full years of '06 versus '07, gross margin increased from $23.4 million, or 37% of revenue, to $31.4 million, or 43% of revenue, a 34% increase.

Our sales, general, and administrative expenses continue to be well under control.

SG&A expense was $1.4 million, or 9% of revenue, in the fourth quarter of '06, and increased to $1.6 million in the fourth quarter of '07.

But that decline -- it declined to about 8% of revenue at that point.

In the comparative full-year periods, SG&A was essentially flat at $5.3 million, but as a percent of revenue also decreased from 8 to 7%.

Net income rose 56% from the fourth quarter of '06, when it was $2.3 million, or 14% of revenue, up to $3.6 million, or 19% of revenue, in the fourth quarter of '07.

For sequential quarters, the third quarter of '07, net income was $3.3 million, it was $3.6 million in the fourth quarter of '07, a 9% increase.

For the full year, we had a 62% increase in net income from $7.6 million, or 12% of revenue in the 12 months ending '06, up to $12.3 million, or 17% of revenue for the full year 2007.

I do want to note that we had a $400,000 net positive impact in 2007, from year-end tax reconciliations.

This is driven by higher federal domestic production activity deduction and lower state tax assessments than were estimated, and it's translated into $0.03 a share.

We will reduce our estimated tax rate from 37% down to 35 or 36% going forward in 2008.

Now looking at EBITDA, or earnings before interest, taxes, depreciation, and amortization, it was $7.3 million in the fourth quarter of '07, compared to $5.7 million in the fourth quarter of '06, a 28% gain.

Sequentially, EBITDA declined a bit from $7.5 million in the third quarter of '07, down to $7.3 million in the most recent quarter, fourth quarter of '07.

This is primarily related to our SG&A expenses running $240,000 higher in that quarter.

This was predominantly a charge for stock options awarded at the end of the year and end-of-year professional fees related to routine audits and (inaudible) compliance.

For the comparative full-year periods, EBITDA increased by $7.8 million, or 40%.

EBITDA continues to run very strong as a percent of revenue.

The fourth quarter of '06, it was 35% of revenue.

Fourth quarter of '07, it was 37% of revenue.

And it grew from 31% to 38% of revenue for the comparative full-year periods.

Fully diluted earnings per share for the fourth quarter of '07, was $0.30.

This compares to $0.19 in the comparative fourth quarter of '06, a 58% increase.

This compares to $0.28 per share in the prior quarter.

Comparing the full 12 months, diluted earnings per share grew from $0.66 to $1.01, a 52% increase.

I'm happy to say that we have almost doubled our fully diluted earnings per share from $0.52 to $1.01 over the past three years.

And that doesn't take into account that we have twice as many shares outstanding during the same period.

Now looking at some segment breakdowns, starting with total sales revenue.

Total sales revenue was $9.7 million in the fourth quarter of '06, compared to $10.9 million in the fourth quarter of '07, up 12% from the year-ago quarter.

Gross margins for total sales improved from 26% in last year's quarter to 33% for this year's period.

Sequentially, total sales revenues increased 3% from $10.6 million to $10.9 million this quarter, while gross margins decreased from 35% to 33%.

This decrease is because the gross margin of our compressor sales, which accounts for 83% of total sales revenue, dropped from 32% in the third quarter of '07 to 31% in the fourth quarter of '07, a decline, albeit very small, in gross margin.

But these continue to be record-high industry margins.

Compressor sales revenue alone increased from $7.1 million in the fourth quarter of '06 to $9.2 million in the fourth quarter of '07, a 30% increase.

That's excellent growth, and we're doing very well in our compressor sales business.

But I want to remind everyone that this is a variable business with revenues that trend up, but they can be highly variable quarter-to-quarter and should be viewed in the context of our 12-month year-over-year growth was approximately 11%.

Consecutive quarterly compressor sales revenues grew from $8.9 million in the third quarter of 2007 up to $9.2 million in the fourth quarter of '07.

Our sales backlog, compressor sales backlog, at our fabricating facility in Tulsa is currently over $25 million, which is essentially the same level as it was in the prior quarter and year-ago comparative quarter.

Now looking at compressor rentals, rental revenue continues to grow at a very strong rate.

Fourth quarter of '06, rental revenue was $6.6 million, fourth quarter of '07, it was $8.4 million, a 27% increase.

Rental revenue increased sequentially from $7.9 million to $8.4 million, a 6% gain.

And looking at the full-year periods of 2006 versus 2007, rental revenue increased from $23.5 million up to $30.4 million, a 29% increase.

Now, rental gross margin as a percent of revenue in the fourth quarter of '07 was 58%.

This compares to 60% last quarter.

We ended the full year of 2007, at 59% gross margin in the rental business, compared to 62% in 2006.

As I've mentioned before, although we have one of the youngest fleets in the industry, units that are three years old or older are now entering their overhaul cycle with higher expected expenses.

We have also had a fairly high rate of turn this year on return rental units being repaired and placed back into service, and this tends to lead with expenses followed by revenue.

But we still expect to make a minimum of 60% gross margin in our rental business this year.

We added 75 compressor units to our rental fleet this quarter.

That brings the total fleet to 1,352 units, as of December 30th, 2007.

That's an addition of 239 units in 2007.

Now, this is a bit below the low end of our 250 unit projection.

But the average horsepower per unit built in the fourth quarter was 143 horsepower per unit, which was 20% higher than our fleet average of less than 120 horsepower per unit.

A higher horsepower unit takes more floor time and labor and impacts the number of units that can be built.

So if you essentially looked at the horsepower we built in Q4, on an average unit basis, there's an equivalent of about 85 or 90 units put through there in that quarter.

We ended the year at a rental fleet utilization rate of 88%, which was the same utilization at the end of 2006.

You may have seen our announcement the other day where we closed on the purchase of a new rental fabrication facility here in Midland.

We closed on it -- or in December.

And by the end of January this year, we had completed our move into it.

We paid $1.875 million for it and put another $150,000 into it.

That facility has approximately 50,000 square feet of fab space, includes over nine acres of land.

It doubles our ultimate compressor output -- rental compressor output, which we plan to ramp up to in two to three years.

But we will start the first year, 2008, by adding an estimated 300 and -- 300 to 350 compressor units to our fleet.

This would be a record rate of rental growth for us.

Now, our other sales revenue, which includes flares, parts, rebuilds, third-party maintenance and CiP compressor frames, was $8.3 million in 2006, compared to $7.8 million in 2007.

Now, while revenues were down 6%, gross margin for the 12-month comparative periods was the same at $3.5 million, an increase in that from 44 to 45% of revenue.

Our balance sheet continues to be very strong.

If you look at the end of 2006, December 30, 2006, it gives the same date in 2007, we reduced our total debt by 21%, from $18.4 million to $14.6 million.

At the end of 2007, we have cash and cash equivalents of almost $19 million.

Capital expenditures in 2007 were a bit over $25 million.

98% of this capital was growth capital related directly to growing the rental fleet.

$22 million was rental compression, $2 million in our fabrication building, about $800,000 for trucks and shop equipment, and then another $500,000 for IP infrastructure and security improvements.

Summarizing from a market perspective, we see continued opportunity for our business.

The macroeconomic environment reflecting such things as commodity prices and supply-and-demand trends, support rate of growth going forward.

From a pricing perspective, the average spot prices in 2007 averaged $7.17.

The projected average $7.83 in 2008, which is a 9.2% increase, and $7.93 in 2009, which is an additional 1% increase.

This is a 5% annual increase in gas prices between 2007 and projected through 2009.

Now, since natural gas is predominantly a regional commodity, meaning what is consumed here is generally produced here, what drives prices is, of course, the supply-and-demand equation of the U.S.

Natural gas consumption in 2007 grew 6%.

That's a much higher rate than anyone anticipated.

Marketed natural gas production, the supply side, grew only 2.5%.

Projected consumption in 2008 is supposed to grow about 0.9%, marketed production 2.2%.

In 2009, consumption is projected to grow 1% marketed production, 0.8%.

So between the periods 2007 and projected through 2009, consumption, or demand, is projected to grow 4% per year, marketed production, the supply side, is projected to grow at 3% per year.

As you can see there continues to be the imbalance of supply and demand here in the natural gas market.

We drilled over 31,000 development gas wells in 2007, in the U.S., but our projected gross supply by an average of only 3% per year, while we continue to consume 4% per year.

There will, of course, be annual variability in supply and demand as noted in the projections I just mentioned.

But the direction is clear, we will have continued and growing gaps in supply, and we think activity levels will continue in the future.

From a micro-perspective that is related directly to NGS, becomes more and more apparent, and I think we have proven that our strategy of concentrating on small to medium horsepower is the most active part of the market from a unit perspective and we have been very successful exploiting it.

All bullish factors from the last two to three years that directly impacted our activity are still in place.

The supply-demand imbalance, decline in Canadian imports, increasing commodity prices, faster well decline rates, and active drilling unconventional gas plays.

Additionally, most operators have raised their 2008 capital budgets over the 2007 spend.

They obviously expect a favorable environment too.

The point I'm making and I continue to make is that the supply-demand characteristics in the U.S.

are not getting better.

We will continue to consume more than we produce and most of the future U.S.-based production will come from the unconventional gas plays that NGS focuses on.

We will see prices, storage, and activity fluctuate.

The long term looks good.

We are very well positioned in our market of choice.

And as long as we continue to execute as we have, we will continue to grow very well.

I have always stated that we lead with service, meaning that we don't just rent equipment, but we provide a total compression package, equipment, service, and maintenance.

I've been especially encouraged by the excellence we are seeing in our sales and field force.

We are well accepted by our customers as having some of the best service, equipment, and people in the industry.

I always want to close thanking all of our employees for the continued work.

It's only through their efforts that NGS has been able to grow and prosper and they are very much appreciated.

Ross, that's the end of my remarks.

I'll turn the call back over to you to open up the lines for any further questions.

Thank you.

Ladies and gentlemen, at this time, we will conduct the question-and-answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from Steve Ferazani from Sidoti and Company.

Please ask your question.

Morning, Steve.

Hi, Steve.

Can you give a sense -- can you give a sense, if you can add 300 to 350 packages to the rental fleet next year, I mean, would this be in your -- the Barnett Shale, San Juan Basin, or what's your efforts in terms of expanding geographic reach right now?

Well, yes, San Juan Basin and Barnett are still the two biggest areas.

And I think I pointed out in the last call, but I'll reiterate it, Barnett Shale is now our single largest area as far as number of units on the ground.

It passed San Juan about midway last year.

So those two areas are still growing well.

And we also see additional growth in some new areas we're starting to move into, specifically east Texas and Oklahoma.

So we think those'll be -- we think our existing areas will still be probably the majority of that build, but the additional units we're talking about adding this year will also be spread out in some new areas.

Can you give a sense of how finding personnel is working out and how we should look at SG&A moving forward as you move into some of these other regions?

Well, we're actually having better results finding people, it seems like, recently than say a year or even a year and a half ago.

I mean, things are still tight in the business.

As long as activity keeps going like this, there's just a finite number of people.

But to point out, I think our service reputation is really getting built up pretty well in the field.

We're getting to a size where a lot of people are hearing about us from, not just from the customer side, but when you look at hiring mechanics, they like to go to work for a good company too.

So we seem to be having pretty good luck here recently with bringing in some real good people.

Excellent.

Last question would be on the sales side, given that backlog was about where it was the last quarter.

What are the opportunities for sales growth?

Should we look at this level being a pretty good level over the next few quarters and what your capacity is at the Oklahoma facility?

Well, I think we've always kind of looked at the growth on the sales side as being about 5 to 10% a year.

And I think we hit a little higher than that this year.

But that -- I think that's a good average number to use looking at that business.

We -- our backlogs stay about the same on an average.

Now, about halfway through '06, I'm thinking it dropped down a little below 20 million, but then it built back up.

So that's, as I always say, that tends to be the more variable part of our business as far as how quarterly revenues run.

But we think that's, again, a 5 to 10% a year growth business for us.

We're having excellent results with it.

So we're happy with that kind of growth rate based on where we are.

Okay.

Appreciate your time, Steve.

Okay.

Thanks, Steve.

Our next question comes from Mike Drickamer from Morgan, Keegan.

Please ask your question.

Hey.

Hi, Mike.

Good morning, Steve.

Let me follow up on the last question about sales and your capacity there.

If you look at the 239 units you added to the rental fleet in 2007, how many of those came out of Tulsa?

None.

None?

No.

Okay.

So by adding this incremental capacity in Midland for the rental fleet, that doesn't really add anything to your sales capacity, does it?

No.

Okay.

Actually, well, yes, not -- I probably shouldn't be as black-and-white as that sounds.

We will, if we have to, and that was the original thing, even back in the acquisition originally three years ago, if we need to shift back and forth to either handle an overflow in one respect or maybe some open spaces in another respect, we're able to do that.

And if we get -- if we get some additional sales that maybe we can't handle through Tulsa, we certainly got some space down here that we might do some of that stuff too.

So it's not quite that black-and-white.

But generally we do try to, as you know, build the rentals here, build the sales units up there.

Okay.

And with that $25 million backlog, what's the wait time on a compressor now, if I walked in and ordered a standard compressor off the shelf right now?

Of course, it varies according to size and how detailed you want to get.

But generally, you can -- we've got -- we're still filling slots throughout the year.

So if you came in today and wanted to buy an average compressor from us up out of Tulsa, it'd probably be a four-month delivery, roughly.

Four to five months maybe.

Okay.

So you don't have incremental capacity then coming from Midland where you could reduce that wait time if you really wanted to?

Well, if we want to we can.

But if you just walked in and said, "Hey, what can you do?" "Here's what we can do now." If we, again, if we get somebody in a press or a rush and we have to do something, then we would start looking at Midland from the point of, do we need to shift something or do some overflow or things like that.

And then you had a pretty good quarter for sales revenue.

By my recollection, there were some issues that affected Oklahoma in the quarter as far as weather concern.

How much were you impacted by the weather in Oklahoma the fourth quarter?

Well, it probably -- it did impact us just a little bit, probably not over $0.5 million in revenue.

There were -- you're talking about the ice storms, I guess --

Yes.

-- up there?

We were down, I think we were down a couple days, but we had some glitches from the supply side where suppliers couldn't get back up as quick.

It wasn't a big amount, because, again -- I don't remember exactly when those storms were, about early December.

But we already had, certainly, what we were going to be doing and most of the stuff already in the shop, so we could just continue working as long as we had power, which after a day or two we did.

So it didn't have a whole real big impact on what we were doing.

Okay.

And then if you look at other parts of the oilfield services industry, pricing has been one of the issues of recent.

What are you seeing in pricing as far as the rental fleet's concerned?

As you know, we've done a couple price increases per year the last few years.

And I think I mentioned the last time our price is still holding up fine.

We're not really seeing any issues or pressure from that standpoint.

Now, going forward on price increases, we're going to be a little more strategic about it -- that's a good word -- versus maybe some blanket increases.

We'll probably look more at areas, popular models, things like that.

We might be a little more surgical with some of them, because some of the markets are a little less active than some of the others.

And as you said, there's just a general sensitivity out there.

I don't think necessarily from anything we've done, but just a general operator sensitivity to price.

Kind of --

Okay.

-- you know, when you go out and -- personally when you buy a car and it's more expensive, buy a house and it's more expensive, it's -- and then even when you buy bread and it's more expensive, you still tend to get excited about it.

All right.

Steve, every quarter I have to ask you about the margins on the sales there.

33%.

Is that right?

Levels have been running higher than what you are comfortable with.

Is there anything you see on the horizon here, anything now that you've got at least halfway through this first quarter where perhaps that 33% does not recur?

Well, I think just, as you know, I've always tried to tamp that down, just from a conservative standpoint.

And then you come out and beat it every quarter.

Well, I'm still going to -- I'm still going to take the conservative stance from the point of a couple things.

I keep saying those are industry high margins.

We've got our cost in place, in good shape, just to where we can maintain them.

But if we get any cost increases, those could narrow a bit there too.

The other thing is, as I always say also, variable business, revenues and margins can move around quite a bit on that.

And we are trying to diversify that business a little more, additional customers and things like that.

So those things, all three, can combine to be, you know, what starts to be a variable business to even make it a little more volatile.

So I'm still reluctant to -- I gave you a couple points last time, and --

I'm trying to get everything I can out of you here, so.

No, I understand.

I understand.

But I'm just -- I'm just going to have to stay conservative on our outlook.

All right.

Thanks a lot, Steve.

Thanks, Mike.

(OPERATOR INSTRUCTIONS) Our next question comes from Shawn Boyd from Westcliff Capital Management.

Please ask your question.

Steve, how you doing?

Hi, Shawn.

How are you?

Good.

Just a few questions here, if I may.

On the expansion, we're looking for 300 to 350 units in terms of adds to the fleet here in '08.

I know kind of longer term, we're thinking about being able to add 550 to 600 a year eventually.

Can you give us a little color, I guess maybe that's out like a 2010 time frame.

Can you give us an idea here of what this ramp looks like, '09, oh 10 -- 2009, 2010?

Okay.

Well, and that's about it.

Like the space did increase by -- we about doubled the space.

So you just take the normal 250, 300 we see in the past, you're like -- you're saying 500, 600.

So the number's correct there.

And what we are projecting is, we can't go out today, just because we have that in place, and go twice as fast for a few reasons.

Number one, people.

We're able to get people, but you can't get all you want next week.

So that's going to take some ramp-up time to make sure we're bringing in the right people and getting that done.

Some of it's suppliers' standpoint.

We can't go out and get twice as many engines tomorrow.

Suppliers have to be brought up a bit.

So that's going to take some time.

And then we also have to develop the markets out there.

We've got good markets where we are.

But east Texas, the Oklahomas, Appalachians, Rocky Mountains, we're simultaneously developing those markets as we ramp up the throughput.

So it's -- we're, just as a rough idea, we're kind of looking at a 300 to 350 this year, and, of course, all this might -- as long as the market holds up, 400 to 450 next year, and the 500 to 550 the year after.

It's just a very rough 50,000-foot view look at that thing as to how we'll ramp up to that capacity in probably about 2010.

Got it.

Got it.

So call it kind of 100 a year off that '08 base?

Right.

And then we've still got headroom beyond that to that 600 level.

Well, what do you mean?

Excuse me?

You say 600 beyond that?

No, no, no.

I think we had talked about 550 to 600.

So --

Right.

-- there's still -- there's still -- my only point, there's still a little cushion in there in terms of your capacity --

Right.

-- assuming you can get the other three key pieces that still -- in place.

Right.

The gross margin on the leasing account on that rental fleet, when we look at that running a little bit lower in the fourth quarter, you mentioned the older units and entering the overhaul segment there.

What should we think about into '08 and '09?

I mean, can we see that come back to the -- that 60% range?

Do we need to keep it down at 59?

What's your thought on that gross margin?

Well, our -- we intend to maintain 60% of the minimum in '08 and beyond on that.

And again, it's -- I think it'll be average for the year is our target there.

So I think we're okay using that number.

What we get fluctuations on with that somewhat is, as I mentioned -- and I didn't go into all the details.

But, certainly, you get some seasonality in that just from the point of winter becomes a more expensive time to operate for some areas, specifically Farmington or San Juan Basin.

So you get a little -- you get a little play there.

We have had a lot of units entering their three-year cycle.

We've been going through that throughout the year.

And then a lot of, you know, the ones that are going back out, we always go back through them, check them out, make sure they're in good shape when they go back out.

So those three things plus -- combine to drop us a couple points in Q4.

But our intention and projection is to be at 60, 60 as a minimum for the average of '08.

Okay.

And then -- and I assume targeting back to the 61, 62% level you were at in '05, '06?

Well, yes, that'd be the homerun.

But again, that's where we're getting affected more so by these -- you know, each year some of this equipment gets a year older and enters that overhaul cycle.

And that's what -- that's -- those are expected expenses.

We knew they'd be coming.

But that's probably what'll keep a lid on those margins on the up side.

Got it.

Okay.

On the pricing, just a follow-up to the earlier question.

With kind of the selected increases, is it fair to think about, you know, call it a low-to-mid, well, kind of 4 or 5% sort of effective increase on the year in terms of pricing?

I think that's reasonable.

We haven't -- we haven't done -- our last price increase was August '07, and we haven't done anything since then on it.

And I think that's probably reasonable.

It's, again, there is sensitivity out there.

We see it.

We hear it.

We feel it.

We're not getting any pressure on the equipment we've got now going out.

And we tend to be a premium priced provider out there.

So I think we've been very reasonable in our price increases in the past where they've been the 6 or 7% ones and not the 10 or 15 percenters.

We've been able to keep up with the market in that.

But, yeah, it'll be at the lower end of the range we've seen in the past, like you mentioned, the 4 to 5%.

And again, we're just going to have to be -- we'll be doing it in the areas that justify where we're -- where we've got 100% utilized on some types of equipment or where we've just got areas we're really having to spend more money in to try to keep them growing.

My other question on pricing, Steve, is that, in fairly recent days here, recent weeks, we've seen a real nice move up in the natural gas prices, right.

So we're sitting here on a strip that goes from 9 to 10 bucks now all the way through '08.

And I'm just wondering, how quick -- how quick does that -- assuming that holds, how quick does that sort of flow through and change that kind of price sensitivity or negativity toward increases, that attitude shift, to your --

Well, you'll probably get a different response from me than from our customers.

They'll say never.

I think, as always -- it's always -- it's always a long-term expectation of prices.

It's not what it's doing day-to-day.

So if the operator thinks it's going to be $8 for a week or $8 for a year, it's a world of difference.

I think, looking at the capital budgets, that everybody's announcing, and they all seem to be going up, I really don't think I've even seen one that's even flat.

I think everybody's increasing somewhat.

And that's U.S.-based activity, not global or international either.

Right.

So I think, hopefully, there's a little leeway from our side too, because we are getting increases in equipment and we'll get the same thing, you know, we buy oil, we buy gasoline, and things like that.

So I think we'll be okay.

We'll just have to kind of work it the best we can.

But it's -- and again, I think we've got -- the thing we've always got going for us is we're not just able to come in and say, well, hey, our costs have gone up, et cetera, et cetera, but we can come in and say, certainly cost is a piece of it, but, you know, look at this, good equipment, good people, good run time, et cetera, et cetera.

We've got the equipment.

We're building this stuff for you.

So we've got a lot of other, "intangibles", that I think we can -- we can use to stay ahead of that curve.

Okay.

Last question for you, Steve.

I really appreciate the color here.

Is just as we think about the quarters in '08, first, on the leasing side, adding 300 to 350, should we -- should we add those an equal amount each quarter or should we do more in the -- can you give us a feel on kind of quarter-by-quarter how those 300 and 350 come into the fleet?

Well, let's just -- let's just use the number 300, because that's easier for me to calculate.

So that's 75 a quarter if you just did it straight like that.

I would -- I would ramp it up to about mid-year, then just have the last two quarters about the same.

So and I haven't sat here and thought about it too much.

But -- because we are -- we're in the new facility, but we've still got to be -- but we're still adding some people in there, buying some -- got to put in new stations, welding stations, and things like that.

So there will be a ramp up in Q1, a little in Q2, and -- but then I think Q3 and 4 will be about the same.

So off the top of my head, if you say, and just roughly, if you said 80 or -- what 85 and 85 Q3, Q4, that's 170, less 300.

130.

65, 65.

So I mean, it's going to be some -- or 60, 70, 85, 85, is some just rough ramp.

But I'm not -- I'm not projecting and saying those are the exact numbers.

But I'm just, as an example, how to ramp that up.

Yes.

That's real helpful.

Real helpful.

And then over on the sales side, that seems a little bit more linear.

You know, we take the 5 to 10% growth for the full year.

What do you think there?

Any reason to think Q1 is a lot lower, or -- any seasonality in there we should knock around?

Well, it's not seasonality that makes that variable.

And I'm sure you've seen our curve where the trend is up, but, boy, quarter-to-quarter that stuff moves up and down.

It's --

Right.

As I've mentioned, it's -- we're fully at the mercy of our customers and when they place orders.

I mean, we have them constantly come back and said, "Well, you know, what, that's how I want it now.

But, hey, my pipeline's running late or I've got to get this in quicker." So we're constantly shifting equipment in the schedule back and forth.

And it's -- the best I can tell you, Shawn, is just you just got to use a 5 to 10% as an average growth and draw that line and know it's never going to hit that line, it's going to be above it or below it each quarter.

And I wish I was smart enough to tell you exactly how, but it's just the number of customers coming in and just putting orders in and shipping them around all the time.

It's just hard to really project very close, except just on a 12-month trend.

Understood.

Let me -- let me give it up here.

And congratulations, Steve.

Nice quarter.

Okay.

Thanks, Shawn.

We have a follow-up question from Mike Drickamer from Morgan, Keegan.

Please ask your question.

No, Mike --

Steve, I think you're --

-- I'm not going up.

Steve, I think you're plenty smart enough here.

Follow up -- I apologize if I missed this earlier.

What was rental fleet utilization in the fourth quarter?

89.

89 or 88.

I think -- I think maybe -- I think maybe it was 88.

Yes, 88.

Same as end of '06.

Okay.

And that's relatively flat, maybe down a little bit sequentially?

I -- yes, I think Q3 may have been 89.

I think Q2 was 87.

So it's -- I think it's actually averaged 88, it's just we had a point up, point down by quarters.

Okay.

Now, looking at the expansion, you talked about the issues affecting the expansion.

You can't go to 500 right now because of people and engines and everything.

But hypothetically, if you had the people, if you had the engines, is there the demand in the market for you to add that many compressors?

Well, there's a ramp in market development, as I mentioned too.

I don't know if the -- I don't know if the market would take the full 500 if we could do it.

But it might take 350 to 400, something similar to that order, which would be another 10 or 15% on top of the 20, 25%.

So I mean, we're obviously seeing a strong market in '08.

And I think probably as we get out there from a marketing standpoint and really develop these markets I mentioned further, there's probably a lot more out there we don't even see yet.

Okay.

All right.

So a combination of the continued secular shift in the industry towards to the unconventional gas and your geographic expansion's how we're going to get to the 500 to 550 compressors?

Over -- ramping up to that?

Yes, in 2010.

Right.

Right.

Yes, it's going to be -- it's going to be primarily -- well, I'm basing that based on the activity we see, which I think ought to continue.

There'll be glitches in it.

But I mean, all the, as I mentioned, the bullish factors we've seen the last two or three years are still there.

Okay.

So basing activity on that and then again us developing markets further, we've moved into the Rockies and Appalachia a year, year and a half ago, we're now moved into a couple others.

So I think as those develop, and those are very good markets.

There's no reason we can't -- we've had a lot of luck picking up share besides just the general increase in activity.

So there's no reason that we shouldn't be able to ramp it up like we're saying, everything staying even and the market holding up.

Steve, there's been a lot of interest recently in the northeast, drilling activity picking up in Pennsylvania and that.

Is that a market you guys could expand into?

Yes.

Yes.

We've got some stuff out in West Virginia right now and actually it's pretty big stuff for us.

It averages a little over 400-horsepower unit and it's coal bed methane.

And, yes, Appalachia is an area of interest to us and really want to see it grow pretty well next year too.

Okay.

Thanks a lot, Steve.

Thanks, Mike.

We have a follow-up question from Steve Ferazani from Sidoti and Company.

Please ask your question.

Yes, Steve.

I just wanted to follow up on some of the things you were just commenting on.

As you've pushed, particularly I know this quarter was into Oklahoma some more, can you give a sense -- I mean, is it more just the market is growing or what's been your ability to gain customers, gain market share from other guys who are out there?

Well, it's both.

Certainly the -- we get growth just from the rising tide, everything being active.

But we're -- where we're making in-roads on market share I think is exactly what I mentioned.

We've -- we're getting -- we're getting pretty well known and recognized as the small to medium horsepower guy.

And so -- and when that bring you some people, that doesn't -- but really what keeps -- what keeps it going is the good quality equipment we build and the good service we provide.

I know that sounds trite and everybody says that.

But, I mean, I've really heard some good things from customers and everybody else about the job we're getting done.

So that's what -- that's really what it does, it just -- it just gets down to this service business.

And as long as we can do that, provide the people and the equipment, we'll -- we're able to take a share that way.

Can you give a sense, as you mentioned, some of these new markets, has it been easier or tougher than you were expecting?

Is the name -- is the brand name growing and is going to get easier moving forward, do you think?

Well, the name's growing.

But that never gets you work.

I think it, again, it might get you in a door and maybe gets you unit number one.

But if you don't keep it running, if you don't take care of it, you don't get unit number two, three, four.

So certainly a little better-known name, if nothing else, just saves us time on the phone when we're contacting somebody.

But really just comes down to what you do when you get out in the field.

And that's really where the word of mouth gets going.

And that's the main driver of our growth and share take is just people in the field talk and they talk good and they talk bad.

And you want them talking good, and I think that's the way we've got it going.

Okay.

Just one last thing was, did you say tax rate going into '08 would be lower?

Yes.

We haven't got the final number figured out, but we've been running -- we've been using 37%, and it'll be 35 or 36.

Okay.

Great.

Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from Bob Johnson from Satuit Capital.

Please ask your question.

Hi, Steve.

Hi, Bob.

Steve, it's not a question.

It's an observation.

I just want to say that you and the management team are doing a superb job of growing the company, and we, as shareholders, applaud you for that and appreciate it.

Well, great.

I appreciate that.

And next time you or anybody else is in Midland, be sure and stop by, we'll show you a new shop.

Give me a reason to get down there.

Look forward to it.

If that's not enough, we'll buy you a bar-b-cue too.

Okay.

Thanks, Steve.

Thanks, Bob.

Take care.

Mr.

Taylor, at this time, we have no further questions.

Okay.

Ross, appreciate your help.

Jim, thanks a lot.

Yes.

Good call.

Everybody that joined us, certainly appreciate the listening in and the questions.

And we look forward to visiting with you against next quarter.

Thank you.

This concludes today's conference call.

Thank you for attending.