Natural Gas Services Group Inc (NGS) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group first quarter earnings release and 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, 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, Erica.

Good morning, everyone.

It is my pleasure to read the forward-looking statements.

I'm going to get right to that.

Except for historical information obtained herein, the statements of 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's actual results in future periods to differ materially from forecasted results.

Those risks include, among other things, the loss of market share through competition or otherwise, the introduction of competing technologies by other companies, 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 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 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 10-K filed with the Securities and Exchange Commission.

With that, I would like to turn the call over to Steve Taylor, Chairman, President and CEO of NGS.

Steve?

Okay, thanks, Jim, thanks, Erica, and good morning to everyone.

And I want to thank you for joining me for Natural Gas Services Group's first quarter 2008 earnings review.

If you were able to review our earnings release this morning, you can see that, in comparative first quarters, we continued to post 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 32%, our net income was up 31%, EBITDA was up 25%, and total revenue was up 13%.

In comparing the first quarter of '08 to the first quarter of '07, total revenues were up 13%, from $16.7 million to $18.9 million.

Sequentially, total revenues fell about $600,000 from the fourth quarter of '07 to the first quarter of '08.

This is attributable to a not uncommon quarter-to-quarter variation in our compressor sales that we often see.

Comparing the first quarter of '07 to the first quarter of '08, gross margins grew to $8.9 million, or 47% of revenue.

That's up from $7.1 million, or 43% of revenue, a 25% increase.

Sequentially, gross margin increased from $8.6 million, or 44% of revenue, to $8.9 million.

Our sales, general and administrative expenses continue under control.

SG&A expense was $1.2 million, or 7% of revenue, in the first quarter of '07, and increased to $1.35 million in the first quarter of '08, also 7% of revenue.

Net income in the first quarter of '07 was $2.7 million, or 16% of revenue.

It rose 31% to $3.5 million in the first quarter of '08, or 19% of revenue.

Sequentially, the fourth quarter of '07 versus the first quarter of '08 was down $100,000, from $3.6 million to $3.5 million, those both around 19% of revenue.

This decrease in net income quarter to quarter was due to a tax rate of 35% in this quarter, which is higher than last quarter's rate, when we had a favorable tax rate of 27%, which was due to domestic production tax credits and favorable state sales tax apportionments taken in the fourth quarter of '07 for the full year of 2007.

To quantify the tax impact between quarters, net income before taxes rose 8% sequentially, from $5 million up to $5.4 million.

EBITDA in the first quarter of this year was $7.8 million.

That's up from $6.3 million in the first quarter of 2007, or a 25% increase.

Sequentially, EBITDA increased from $7.3 million in the fourth quarter of 2007 up to $7.8 million this quarter, a 7% increase.

EBITDA continues to run strong as a percent of revenue.

This current quarter it was 41% of revenue, compared to 38% of revenue in the first quarter of 2007.

Our fully diluted earnings per share for the first quarter of 2008 were $0.29.

This compares to $0.22 in the first quarter of 2007, a 32% increase.

This also compares to $0.30 per share earnings in the prior quarter, the fourth quarter of 2007, again due to the difference in tax effects just mentioned.

Looking at revenue, our total sales revenue consists of compressor sales, partial rebuild sales, CiP, or reciprocating compressor, frame sales and Flare sales.

Total sales revenue in the first quarter of '07 was $9.5 million.

That compares to $9.6 million in the first quarter of '08.

This small increase year over year was primarily due to a large amount of CiP frame sales for an air drilling application in the first quarter of 2007 that didn't repeat in this quarter.

Sequentially, total sales revenue dropped from $10.85 million in the fourth quarter of 2007 to $9.6 million in the current quarter, again due to normal sales variations we see, and primarily due to a large horsepower shipment to Mexico that we made in the early part of the fourth quarter of 2007.

Gross margins for total sales improved from 30% in last year's first quarter to 34% for this year's comparable period.

Compressor sales revenue alone increased from $7.5 million in the first quarter of '07 up to $8.3 million in the first quarter of '08, an 11% increase over the year.

As I always point out, this is the relevant number in the sales business, 12-month trends, and not quarterly fluctuations.

Consecutive quarterly compressor sales revenues decreased from $9.2 million in the fourth quarter of 2007 to $8.3 million in the first quarter of '08, due to the previously noted sales into Mexico.

Gross margins for compressor sales alone were 31% in the first quarter of '08, versus 26% in the comparative year-ago quarter and 31% last quarter.

Our compressor sales backlog at the fab facility in Tulsa is currently over $21 million.

Rental revenues in the rental fleet continue at a high rate of growth.

The first quarter of '07 had rental revenues of $6.9 million versus $9 million, or a 30% increase, for the first quarter of '08.

Rental revenue increased sequentially from $8.4 million to $9.0 million, a 7% gain this quarter.

We have grown the rental fleet at a 35% compounded annual growth rate since 2002, and it looks like we are on track to be in that ballpark again this year.

Rental gross margin as a percent of revenue this quarter, the first quarter of 2008, was 62%.

This compares to 58% last quarter and 61% in the year-ago quarter.

We added 69 net compressor units to our rental fleet this quarter.

That brings the total fleet to 1,422 units as of March 31st, 2008.

This is in line with our projected ramp up mentioned in the last call to add 300 to 350 compressors to the fleet this year.

We were able to do this in spite of moving into our new facility in the first quarter this year and lost time of over 1,500 hours, or 150 man-days, this quarter due to flu and illness.

For the second quarter in a row, we are seeing demand for--and are correspondingly billing--a larger average fleet unit this quarter, the same as we did last quarter.

The fleet average is now 121 horsepower per unit, while the build this quarter was an average of 155 horsepower per unit, 28% larger than average.

Our average last quarter was 143 horsepower per unit.

We do, however, expect this to come back to closer to the average in the next quarter.

Today, we have 46 rental units contracted to customers that are scheduled to be built.

Of those 46, 21 are currently on the floor here in Midland, being built.

Although we added 69 units to the fleet, we rented 83 and ended the quarter at a rental fleet utilization rate of 90%, compared to 87% a year ago and 88% last quarter.

Now, looking at our other sales revenue, which includes all sales other than packaged compressor sales, it was $2 million in the first quarter of '07, compared to $1.3 million in the first quarter of '08, the decline being due to last year's sale of CiP frame compressor frames I mentioned.

Gross margins for these sales run in the high 40%-low 50% range.

Our balance sheet continues in very good shape.

Our cash position was at $68.5 million at the end of the quarter, with total debt, short-term and long-term, of $12.1 million.

We've been drawing down our cash balance an average of almost $4 million per quarter this past year, and we'll need to bring in additional financing in the next quarter or so to support continued rental fleet growth.

Summarizing, we've had another good quarter and anticipate that it'll be another good year.

All the factors that have driven our growth the last few years are still in place, and some are even stronger.

Looking at our markets from a macro supply-demand perspective, and starting with a look at LNG -- LNG construction is off schedule and slower than anticipated, and imports haven't materialized as predicted.

In fact, it was reported yesterday that China apparently outbid Europe and the U.S.

for the last uncommitted volumes from Qatar, the world's largest producer of LNG.

According to Bloomberg, the Qatari energy minister said, "We are not in the charity business.

Whoever will give me the best price, I will follow.

We are sold out." A scant two or three years ago, LNG was seen as the savior from natural gas shortages and high prices.

I've been saying that I think LNG will only fill the supply gaps developing, but now I'm not even sure of that.

I think there's a real downside developing for the U.S.

energy fixture--not for NGS, but for our country.

As natural gas moves from being a regional to a global commodity due to its increased transportability, there's a real danger of a Middle East cartel.

There's been talk of this the last couple years, and I think it is becoming a greater possibility, and with that comes higher prices and the potential for market manipulation from these cartels.

Because it can be transported anywhere, LNG is a chain that links global markets for natural gas to an oil-equivalent price, and there will be little reason for natural gas to be discounted against oil on a Btu basis as it is now.

I even read recently where the price of incremental natural gas supply in Asia may be approaching $20 per million Btu.

That's two times the present U.S.

price.

But it is close to parity with oil based on Btu value.

Near-month future quotes are about $12.50 at the national balancing point in the UK, and about $10.50 (inaudible) here in the U.S.

The U.S.

is not the price setter for LNG, and in fact it may be the price floor.

Why all this talk about LNG?

Number one, it's kind of interesting, and two, it's important to the U.S.

natural gas fixture.

First, I don't think it'll negatively impact NGS from a supply standpoint, and I don't--and I think it might actually end up benefiting NGS, from a natural gas pricing scenario, long-term.

Coal-fired plants are off.

Over 20 coal-fired generating plants have been cancelled in the last 12 months.

50% of present U.S.

generating capacity currently is being billed as natural gas fired.

That adds to the infrastructures requiring natural gas in the future.

75% of European generating capacity is being billed as natural gas fired--again, the LNG connection.

Environmentally, natural gas is the best way to reduce carbon footprints among oil, coal or natural gas.

It remains the cleanest fossil fuel available, and I think that will, and should, become a greater driver for its use in the future.

Not including hurricanes, I can't remember pricing being this high in May.

We're in the middle of the shoulder season, when things usually calm down, but we're seeing a confluence of events that we haven't seen lately.

We've come out of a winter with late cold spells that drilled the price up and storage down.

Now, injection season is set to start, and irrespective of the weather, there's a real chance that injection volumes may support prices through the summer until we get into another winter.

If we have a very hot summer with associated air conditioning and electrical demand, prices may not see much of the normal summer deterioration.

For the last two to three years, everyone has commiserated about high storage, but in the recent five to six months, we've erased all of that.

The IEA projects the 2007 average price will be $8.59.

Three months ago, they predicted it to be $7.83.

Their prediction is up 10% over the last quarter.

The actual price in 2007 was $7.17.

The prediction this year is running 20% higher.

We constantly hear of new discoveries by producers--the Haynesville shale, the Marcellus shale, and various others.

These are all unconventional plays.

These are the gas plays of the future.

That's exactly where NGS concentrates.

Over 50% of the drilling is in these areas, and it's the fastest growing source of natural gas.

U.S.

production expenditures, from a capital expense standpoint, grew 0.8% between 2006 and 2007.

It's expected to grow 4.2% between 2007 and 2008.

That's quite a large increase.

And then, other than LNG, Canadian and Mexican imports are declining, and now the Alaska pipeline, predicted for startup in 2015, has now been pushed out to 2020.

From NGS's perspective, we will benefit from all these macro factors and improve on them.

We can take advantage of these market factors and can execute from a Company perspective.

Our position in the market--we have said that the low- to medium-horsepower wellhead compression business is the fastest growing of all and have proven that.

We think we are the premier provider in this market, and we are very well positioned.

Being in the small- to medium-horsepower wellhead compression business, our growth is more so related to the number of gas wells drilled, which is at a very high level activity, and not necessarily the resulting production growth.

Our existing areas--the Barnett shale, San Juan basin with coal bed methane, the Antrim shale in Northern Michigan--they're all still growing.

And we are accelerating into our newer areas--Appalachia, Rocky Mountains, and East Texas.

Again, being on the production side of the business instead of drilling is an advantage during any short-term market fluctuations.

And compression is now an integral part of a producer's planning in unconventional plays.

It doesn't help you to drill the gas well if you can't produce it.

What used to be a secondary means of producing gas is now predominantly primary, and that's wellhead compression.

Our market position of share continues strong and growing.

Are there risks?

Sure, there are.

There always are.

The risks nowadays are keeping supplies up, keeping people in.

There's always the risk of demand [demand destruction] similar to the economy.

But we know these risks, we've identified them, and we constantly work to mitigate or overcome them.

And to close, as usual, I always want to thank our employees for their excellent work.

It's only through their efforts that NGS has been able to grow and prosper, and I appreciate them, personally and professionally.

Erica, that's the end of my prepared remarks.

I'll now turn the call back over to you and open the lines up for anybody who's got any questions.

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

(OPERATOR INSTRUCTIONS).

Our first question comes from Matt Beeby from Morgan Keegan.

Please state your question.

Morning, Steve.

Hi, Matt.

I'll dive right into it, I guess, on the margin level for both sales and rental, talking about sustainability increases over the 12-month trend that you talked about.

What level do you feel comfortable around both sales and rental margins?

Well, we showed the increase year-over-year, but then the margins stayed the same sequentially, so--and I'm not comfortable predicting those, which is not a surprise to any of you all who have listened to these calls ongoing, because, again, I think we'll revert to the mean over time.

So, I mean, I think I've still got the same position of just being a mid-20s margin business on the sales side.

We saw some improvement on the rental side, up to 62% this quarter.

We typically say that we like the 60 to 62% range, so I think we hit the top end of that range, so it's improving over the years.

So we're thinking that we'll stay in that range going forward, certainly through the year.

Okay.

In rental -- you know I had to ask that, of course?

Yes..

On the rental side, you actually, I think, saw a decrease in costs per compressor.

Is that a function of the horsepower, or is that something else?

Well it's -- we get a little variation quarter to quarter on the rental side from just the level of overhauls we're going through at any particular time.

We had a--I know I talked a lot about that over the last 12 to 18 months, that we entered some of that overhaul cycle.

And we had a lot of that last year, and I think we got it to at least a breathing point, where we didn't have quite as much of that this quarter.

Now, continually, once you're in those cycles, you continually will have that, but we're thinking that the big flush part of it is probably behind us, and now we'll just have kind of an ongoing overhaul expense going out in the future that we think will help us maintain that 60-62%.

Okay.

And then kind of one last one here.

Could you review for us just where and the amount of compressors you have for your key [regions] -- Barnett, San Juan, Antrim, those places, and then maybe talk about some opportunities for Haynesville and Marcellus?

Okay.

Well, our biggest single area right now is the Barnett.

I'd mentioned six or nine months ago that Farmington had always been--or San Juan Basin has always been our biggest.

And I thought it would pass it last year, and it did about six months ago, I think.

And as I've said a lot of times, that's just -- I think it's certainly the most active drilling place in the U.S., and it's got to be the most active compressor place in the U.S.

It's just a very active area, and we've got right around 500 compressors out there now.

In the San Juan Basin, we've got right -- between 400 and 425 out there; the Antrim shale in Northern Michigan, 150 to 175.

Those are our three biggest single areas.

The others--Haynesville has just recently -- there's been drilling going on, but just recently kind of announced.

The Marcellus is coming on.

We're positioned in both of those.

We're not seeing a whole lot out of there yet, just from the point of you'll have the drilling come and then some of that production afterwards.

But we're looking -- I mean, everything you see and read and hear and talk about, it looks like a pretty good place.

Okay, so you guys are just getting ready, then?

Yes.

Okay.

That's all I have, Steve.

Thanks a lot.

Okay.

Good quarter.

Thanks, Matt.

Bye.

(OPERATOR INSTRUCTIONS) Gentlemen, at this time I have no further questions.

Oh, actually we had one just come in.

Our next question comes from Steve Ferazani from Sidoti & Company.

Please state your question.

Good morning, Steve.

Hi, Steve.

How are you?

Good.

It looks like you added, what, 70 compressors to the fleet this quarter.

Are you expecting that to ramp up as the year goes on to get to the 300-350 range?

What are you looking at there?

Yeah, what I just kind of roughly mentioned in the call last time was--and this is just off the top of my head.

I think I calculated real quickly like a 60, 70, 85, 85 quarterly ramp through the year, so we actually beat that 60 level.

And again, that's--I'm not going to take any credit or kudos for that, because that was just an off-the-top calculation.

But we're on the ramp-up.

We're thinking 60-70, 70-80s, and then 80-90 for the last two quarters, and that'll get us into that range.

Now that you're in the new facility for the first quarter, can you give us an idea how that's working out?

Would there be any more efficiencies?

Any opportunities to expand beyond that number, given--now that you've seen the space?

Well, we got pretty well totally moved in by the end of February, so those guys did a great job of getting in there and keeping everything moving.

I mentioned the lost time we had just due to the flu around here, which was much higher than anybody anticipated, and we were still able to add 69 net.

So that went fine, and we're going through that.

Now, we are--in fact, we have started to look at, well, what are some other things we can do there to increase throughput even quicker than maybe what we had looked at before.

In the past, we thought we'd take about a three-year ramp to get to the full capacity there, about 500 to 550.

And that's still the picture we're looking at, but we are trying to look at--as we did in our place-- constantly look at process changes, how are we situating things, what are we outsourcing, et cetera, et cetera, to try to just increase the throughput.

So we're doing that in case we get a need for that, but right now we're still on that 300, 350.

Okay.

What are you seeing on the pricing side?

Well, it's holding up fine.

We did that increase August 1, '07--really didn't have too much trouble with that.

We are looking at another one here in the next month or two, trying to look at that, because our expenses continue to increase-- primarily fuels and lubricants and all those big stuff that compressors take.

So we're trying to--we've held expenses in check pretty well.

We're trying to take a look at that.

And I think, as I mentioned in the past, we're trying to be a little strategic about it.

If we have areas that we need to do it in, we'll try to do that.

If not, we'll try to hold it or do something else.

So we'll probably see something here at least in the next quarter.

But it's largely to pass along higher expense, it's just to try to maintain margins?

Is that --?

Yes.

Yes, it's just--right now, it's just expense-driven.

As you know, when you go fill up, it's expensive, and we buy a lot of diesel.

Got you.

The last thing was just in general on the--with some of the predictions about the Marcellus taking off in the next six to twelve months.

If you see that really rev up, do you have the ability to expand capacity to meet what could be growing demand, or what would be the limitations you have labor-side?

What are you looking at?

Well, and that's exactly what we're looking at, as I just mentioned, trying to get a plan in place if we need to.

If we see a ramp up in any of these markets we're in or going into, that we have the ability to, number one, ramp up and turn it a little more than what we're thinking now, and number two, if we need to outsource a little more.

And we're looking at both those options right now to try to take care of any of this stuff we're seeing.

So, again, we've not seen it yet, but we know this stuff is coming, and people are very, very high on it, so we're just trying to get some contingency plans in place to take advantage if we need to.

Great.

Thanks a lot, Steve.

Okay.

Thanks, Steve.

(OPERATOR INSTRUCTIONS) At this time, we have no further questions.

Okay.

Thanks, Erica, and I appreciate everybody calling in, I appreciate the questions, and we look forward to talking with you next quarter.

Thank you.

This concludes today's conference call.

Thank you for attending.