Natural Gas Services Group Inc (NGS) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group fourth quarter and fiscal year end earnings conference call.

Your host for today is Kimberly Huckaba, Investor Relations.

(Operator Instructions) I will now turn the call over to our moderator.

Kimberly Huckaba.

Please begin.

Thank you so much, Michelle.

And good morning, listeners.

If you would, please allow me to read the forward-looking statement.

Except for historical information contained herein, the statements in this this morning's conference call are forward-looking, and they are made pursuant to the Safe Harbor Provisions, as outlined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements, as you may know, 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 or 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 expectation reflected in the forward-looking statements, include, but are not limited to, factors described in our recent press release and also under the caption Risk Factors in the Company's annual report on form 10-K filed with the Securities and Exchange Commission.

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

Steve?

Okay.

Thanks Kim and Michelle.

Good morning, and welcome to the Natural Gas Services Group fourth quarter and full year 2008 earning review.

As noted in our earnings release this morning, we're very please with our fourth quarter results, particularly in this environment.

Comparing the fourth quarters of 2007 versus 2008, our diluted earnings per share grew 10%.

Net income was up 9%.

EBITDA was up 28%, and total revenue was up 13%.

If you compare the 12 months ending December 2008 to 2007, diluted earnings per share year over year were up 27%.

Net income was up 28%.

EBITDA was up 27%, and total revenue was up 18%.

A look at our total revenue comparison between the fourth quarter 2008 and the fourth quarter 2007, revenue was up 13% from $19.5 million to $22 million.

Sequentially, total revenues declined 12% from the third quarter 2008 to the fourth quarter 2008 from $24.9 million to $21.9 million.

This sequential decline in revenue is due primarily to the comparison itself.

We had record compression sales revenue and corresponding high total revenue in Q3 '08, which, due to the inherent quarter to quarter variability and lumpiness in that business, skews quarterly comparisons.

In fact, the fourth quarter of 2008 was a good quarter and second highest revenue of the year.

This skewed quarter to quarter revenue change will show up in other areas of our financial report today.

12 months of 2008 compared to 2007, total revenues were up 18% from $72.5 million to $85.3 million.

Our total gross margin for fourth quarter 2008 was $10.8 million.

It grew 26% compared to the fourth quarter 2007, which was $8.6 million.

Sequentially, gross margin moved to $11.6 million, down to $10.8 million, again, as a result of the revenue variations between quarters.

Comparing the 12 months to 2007, to the same period in 2008, gross margin increase from $31.4 million to $40.3 million, a 29% increase.

Our sales, general and administrative expense was $1.6 million, or 8% of revenue in the fourth quarter 2007, and $1.5 million, $100,000 less in the fourth quarter of '08, 7% of revenue also.

If you compare the full-year periods, we maintained SG&A at a flat 7% of revenue.

Looking at net income after tax, the fourth quarter of '07 versus the fourth quarter of '08 rose 9% from $3.6 million, or 19% of revenue, to $3.9 million, or 18% of revenue.

This year-over-year quarterly increase in net income was relatively modest, due to an end of the year tax adjustment.

For the same period, operating income increase from $5 million to $6.5 million, a 30% increase.

For sequential quarters, our net income was $4.8 million in third quarter 2008 and $3.9 million in the fourth quarter 2008.

Looking at the full year comparison, net income increased from $12.3 million in 2007 to $15.6 million in 2008, a 27% increase.

EBITDA earnings before interest, taxes and depreciation in the fourth quarter 2008 was $9.3 million, which is up from $7.3 million in the fourth quarter 2007, a 28% increase.

There was also an increase of 37% to 43% of revenue, and 43% of revenue is a record for the Company.

Sequentially, EBITDA went from $10.1 million in third quarter 2008 to $9.3 million in the fourth quarter , but grew as a percent of revenue from 40% to 43%.

Looking at the 12 months, EBITDA in 2007 was $24.7 million, compared to 2008 when it grew 28% up to $34.9 million.

This also rose as a percent of revenue to 38% to 41% of revenue for the comparative 12 month periods.

Our fully diluted earnings per share for the fourth quarter 2008 was $0.33 per common share.

And for the full year period, diluted EPS grew from $1.01 to $1.28, a 27% increase.

Now looking at particular segments, total sales revenue, which includes compressor sales, flare sales, part sales, rebuild and compressor sales, was $10.8 million in the fourth quarter of 2007 compared to $9.4 million in fourth quarter 2008.

This decline is primarily contributed to the comparison between our highest-revenue quarter in 2007 and our second highest quarter in 2008.

Again, the lumpiness of the sales business makes quarterly comparisons less than representative at times.

Total sales gross margins were essentially flat at 32% to 33% in the comparative year over year quarters.

Sequentially, total sales revenue decreased from $13.2 million to $9.4 million, with gross margins flat at 32% for both quarters.

This decline is relative to the extraordinary strong quarter in the third quarter 2008, which was a record quarter.

Full year total sales revenue from 2007 and 2008 were essentially flat at a little over $41 million.

Compressor sales alone were $9.2 million in the fourth quarter 2007, versus $7.1 million in the fourth quarter 2008 and were $11.3 million in the third quarter 2008 and $7.1 million in the fourth quarter 2008.

Full year compressor sales grew slightly from $34.2 million in '07 to $34.5 million in 2008.

Although we don't normally provide a forward look at our revenues, we did anticipate compressor sales revenue in the fourth quarter of our last call would be between $6 million and $6.5 million.

They actually came in $7.1 million.

Compressor sales margins were down in comparative year quarters, from 31% To 26% and went from 29% to 26% in consecutive quarters.

Comparative full year margins were identical at 29%.

The compressor sales backlog at our fabricating facility in Tulsa at the end of the fourth quarter 2008, or December 31, was about $17.5 million and is about $12.5 million mid February of this year.

Look at compressor rentals, rental revenue continued to grow at a very strong rate.

The fourth quarter 2007 we had $8.4 million in revenue.

We increased our revenue in the fourth quarter of 2008 up to $12.3 million or 47% growth.

Rental gross margin as a percent of revenue in the fourth quarter of 2008 was 63%, up from 58% in the year ago quarter.

Rental revenue increased sequentially from $11.4 million to $12.3 million in the current quarter, an 8% quarterly gain.

Looking at the 12 month periods of 2007 versus 2008 rental revenue increased from $30.4 million to $42.8 million, a 41% increase.

Year to date rental gross margin is 62% compared to 59% in the full year of 2007.

As far as rental fleet additions, we added 90 new compression units to our fleet in the fourth quarter of 2008.

That brings a total fleet to 1,752 units.

This is up from 1,353 units at year end 2007, and increase of 399 rental units in our fleet in 2008.

This is compared to our projected addition of 300 units that we made at the end of '07.

We ended the fourth quarter at a rental fleet utilization of 85%, which was the same as third quarter ending, and that is held at of January 31 of this year.

Our balance sheet continues to be strong.

Our total short term and long term--total debt is $16.6 million as of December 31, 2008 And we currently pay 4% on our term loan.

Our total debt to capitalization was 11.3% on December 31, with net debt to capitalization of about 10.5%.

We presently have $7 million drawn on our $40 million line of credit, upon which we also pay 4% and our borrowing base now exceeds $100 million.

As an indication of strength, if you look our last 12 months EBITDA compared with our net debt, we could pay off our total debt in six months.

Capital expenditures in the fourth quarter of this year were $11.1 million, down from $14 million in the third quarter.

And totaled $46.3 million for 2008 compared to $25.3 million in 2007.

In 2008 we generated about $28.3 million cash from operations.

We are fortunate that due to our excellent operating history and balance sheet strength, our bank stands ready to extend additional credit to us when and where we might need it.

As stated in the last call, we anticipate being cash-flow positive in 2009 and not adding to our minimum debt load unless extraordinary opportunities present themselves.

We think some of those might be out there.

NGS had a very good year.

Irregular in many ways.

We are now in a different world.

Demand is down from natural gas and production is up.

Resulting commodity prices have fallen very quick to tenuous levels.

The Energy Information Administration, or EIA, is projecting an average Henry Hub spot price of $5 for 2009 down from $9.13 average in 2008.

And down from the $8.17 average price it predicted just three months ago.

You can see the decline is upon us.

This decline is primarily driven by the industrial and power generation segments.

It's a tough time, and I think it will get worse before it gets better.

In my last call I thought we would see some recovery by mid year.

But now it looks like it will probably be towards the end of the year.

But we are best positioned to weather any storm.

NGS has grown our gross margin and EBITDA absolutely and as a percent of revenue.

So we've been very efficient in our billings to generate cash.

We have consistent industry high margins and growth.

Even in this environment I think we will still maintain our higher percentile margins and growth relative to the industry.

We have consistently reduced debt to a minimal part of our total capitalization.

In the past we were pressured to lever up, we resisted because we didn't see any good reason to do so.

We could and would have if the right opportunity had presented itself.

The valuation didn't make sense, and knowing that this is a commodity and cyclical business we were very cognizant of the need maintain a strong balance sheet.

This isn't our first rodeo.

We have flattened or our reduced our SG&A and overhead.

As 7% of revenue we offered a very tight ship.

In the good old days, which were about six months ago, and over the last three to four years, we have had consistently low overhead expenses.

I don't have to send out emails telling people not to fly first class.

We haven't ever done that.

I don't have to stop construction projects in the works.

We don't build buildings or invest in real estate.

And I don't have to cancel airplanes.

We expect 95%-plus of our capital on growing our rental fleet and have added hard, tangible revenue-producing assets for our shareholders.

This is equipment that has 15 to 20-year lives and will make it through this bump in the road and continue to provide long-term returns that our investors deserve.

Going forward, we are well prepared to compete and win.

Strategically we have the ability to generate free cash.

We are well capitalized and have access to additional credit if required.

We are very strong in our existing operating areas, and we have built and maintained a compression service network second to none.

Tactically, we are cutting our expenses.

Rental fabrication and fuel costs are coming down.

We have added emphasis on rebuild and repair and maintenance services.

Slow times tend to drive operators to repair rather than replace compression equipment.

We're participating in a more vigorous manner in those areas.

We are dramatically reducing our rental fabrication through-put and we are adding salespeople.

We intend to get more than our fair share and continue to penetrate the market.

There are a couple signs that the light at the end of the tunnel may not in fact be a train.

The December 2008 EIA data showed flat growth in month-over-month gas production from November of 2008 to the lower 48 states, and if you exclude the Gulf of Mexico, onshore production climbed 0.6% month to month.

After months of onshore natural gas supply growth, this is a bullish sign.

According to one analyst, we were not expecting onshore growth until the second quarter of this year.

Following supply into the second half of '09 to set us up for a gas price recovery later this year.

EIA's newly released electric power report for 2007 said net natural gas power generation increased 9.8% from the 2006 levels as a gas market share of the overall power supply fixture rose to 21.6%.

And less drilling and reduced well productivity should cut US output by four billion cubic feet a day or 7% in the second half of 2009 compared to the same period a year earlier.

Now from an investment standpoint, I, of course, think NGS is a good a place to be.

I am not, cannot, and will not advise anyone from a personal standpoint.

But I will quote two independent sources and let investors decide for themselves.

From an energy and investment banking firm, "We believe the bad news from natural gas is largely discounted into the price for corporate stocks." Although it will get worse for self months.

Glaring consistency seems to favor oil companies' names which makes us think the smarter move is to accumulate gas (inaudible).

Hence the low-cost names and solid balance sheets are likely to perform best in this environment.

And a well-known, conservative long-term mutual fund operator had three things he watches in the stock.

He watches stock price climb relative to peers, did the company strategy make sense, and are they prudent operators and well positioned to weather the storm?

This is a tough time, but it's not unprecedented.

Been there, done that, got the t-shirt.

Are we confident of what the markets or the economy will do?

No.

But we are confident in what we will do.

We will get through this period in the same relative shape we did in good times.

Performing better than our competitors and relative to the compression services market.

Now, let me comment on the macro picture.

The economy and the government and energy.

There are, of course, two tragedies to our current situation.

First, that it could have been prevented by a Congress that had a clue, and second that the remedies being proposed are likely to be worse than the sickness.

We won't get into the never-ending bailouts that I think will prolong the agony, except to say that I'm extremely disappointed to see our Congress and both parties of Congress use this decline in our economy to advance their particular agendas.

There are 9,000 earmarks in the last bailout round.

After President Obama said he wouldn't allow any.

I'm actually glad this has been acted upon and Congress can get back to the real dangers of the country.

Did A-Rod really use steroids?

Concerning energy policy, there have been numerous accidents by the current administration that will intensely hinder the oil and gas industry.

Punitively, I think.

Ken Salazar, the new Interior Secretary, has taken three actions in the past four or five weeks designed to damage the oil and gas exploration and production in this country.

Withdrew leases that were offered for the extraction of oil from shale and federal lands.

Major operators have been amongst some of the companies working on technology to extract oil by heating the rocks.

Oil shale formations from western US states could hold as many as 800 billion barrels of oil, according to a government estimate.

Now, Bobby McEnaney of the Natural Resources Defense Council, called oil shale development "Nothing more than a dirty, expensive pipe dream." That's an interesting comment, when one, Canada has developed oil shale into a viable source, and two, the US currently consumes a bit over seven billion barrels of oil a year.

Certainly there's no sense trying to develop a domestic energy source that can make us independent of the Middle East.

The second thing Mr.

Salazar did was push back a plan to expand drilling for oil and nature gas to the inner continental shelf.

This when, in fact, the majority of Americans wants us to develop those resource.

Third, he nullified oil and natural gas drilling leases on about 130,000 acres in Utah over the objections of the Utah governor and his Congressional members.

The excuse was that additional review is needed to make sure national parks won't be impacted, even though the National Parks Service had already approved the plan.

The Obama administration just proposed a huge tax increase on the domestic oil and gas industry.

Seven different tax increases.

All with production but in my opinion the most egregious are the repealing on the marginal well tax credit.

This is a credit that serves as a safety net for those wells that only produce small amounts of oil and gas.

Most of these wells are barely economic to keep operating, but collectively they supply almost 20% of the nation's oil and 12% of its gas.

It hurts a small operator which may be a surprise to some, but who is also a small businessman.

And the excise tax on the Gulf of Mexico production.

This is where the nation produces much of its oil and natural gas resources, and where much of our future energy supplies are located.

Why in the world are we additionally taxing an area already developed that provides a large source of our energy needs?

Finally, I wish, on February 3 the US Speaker of the House of Representatives, Nancy Pelosi, named Karen Wayland, currently a legislative director of the National Resource and Defense Council, as her policy advisor for energy.

There's the NRDC again, now in a policy-making role.

Now let's look at oil internationally.

Moscow's recent push of the creation of an OPEC-style gas cartel, and gas plants pushed for 20% market share for LNG in the next 20 years are a clear indication that's Russia plans on being anything but a passive player in the gas markets.

LNG or otherwise.

Russia, Iran and Qatar have taken the first serious steps towards forming an OPEC-style cartel for natural gas.

These three countries together account for 60% of the world's gas reserves.

Russia and Iran have been accused of using their hold on energy supplies to bully neighboring countries.

We have huge reserves of natural gas resources in this country, the US.

And our government does nothing but discourage its use, and what they allow they tax to their best abilities.

We seem to be placing our bets on windmills and sunflower oil.

If we do not wake up, we'll find the same issue with natural gas as we do with oil, and soon.

That's the end of my prepared remarks.

I'll now turn it over to Michelle and open the lines to any of you who might have

Thank you Steve.

Ladies and gentlemen, at this time we'll conduct the Q&A session.

(Operator Instructions) We are now ready to begin.

Our first question comes from Neil [Damon].

Morning, Steve.

Great color on macro.

Say, I was wondering, obviously, you don't give official guidance but as you -- (inaudible) as far as a bit more pessimistic view now maybe not (inaudible) but mid year the (inaudible) It sounds like you are cutting some costs but adding sales, etc.

What -- will you give any idea as far as number of compressors that you potentially could add this year for starters?

Well, boy.

Yes.

We've said in the past, I think the last call, that we can add I think it was up to 200 just based on cash flow, cash flow generated from operations.

Now, we also called that--we'll add a quick caveat, we'll only add what we see the market taking -- right now I don't see the market taking that many yet.

I'm a little hesitant to say what number because it's a very fluid situation.

But right now we're not on track to do 200.

We're probably on track to do less than half of that.

Again, we'll just set up for down as far as we see things developing.

It could pick up toward the last part of the year.

Again if -- if some of the pundits and everybody that I quoted are right, we could see a ramp-up a bit--say in the fourth quarter particularly.

But right now, we're being very, very cautious what we add.

Then you mentioned the service and maintenance component has recently or just in the last year had been relatively small.

How big can that grow in this type of environment, and obviously as you mentioned, I don't like to look at sales on a quarter to quarter, but more on an annual going forward.

What--are you seen sales decreases as well as demand on that.

Well, the service and maintenance business probably won't -- it's about 1% of our total revenue now.

And I don't anticipate it growing.

I don't think it will double or anything in that respect.

That is something that will build to some degree slowly, just like you do anything else.

Unless this slowdown last longer than we anticipate, I don't think it's going to be a big, big piece of the pie.

But it does provide us some cushion in the field to the point of some rebuilds and some field work.

Field operations, field repairs that -- I think it helps support us through some of these times where we may see some softening.

So I don't see the big piece immediately.

And we'll re-evaluate it probably a year down the road.

This is something if you remember in the past we haven't gotten into to much just because when the things were real busy, it was hard to get enough people to go around to everything.

So we concentrate on the rental fleet and use people that are there -- we're trying to stay nimble enough to move in and out of the business line that we need to depending on what the market's demanding.

As far as sales, compression sales or total sales, right now the backlog at the end of the year was about normal, $17 million, $18 million.

It's about $12.5 million mid February.

We still have a lot of the year to add in to that.

I don't think the sales revenue is going to be what it has been the last couple of years.

I'm not really prepared to say what kind of decline I might anticipate or we might see.

I think that the main thing from our business is we have gotten the sales piece down to half of the revenue, over the past years it has been higher than that.

We got the rental piece half and the sales piece half.

Of course, rental carries 2 or 3 times the margin.

So for example, as calculation, we could suffer a 25% decline in sales revenue and only suffer a roughly a third decline in bottom line just due to the margin difference.

We're still early on the sales piece of it, and this is one of the reasons we're kind of looking as some sales people to keep that pumped up.

Doing what we can there.

We'll have to play it as it comes along.

Well, sure.

A couple more questions.

In this type of environment, do you see any clients returning or just letting some compressors go, or are the ones that are out there most likely going to continue to work.

It's just the incremental that we could see a difference on.

Yes.

We're going to see something of everything.

We're going to see stuff coming back.

Stuff going out.

Price pressures on new stuff, on existing stuff and everything else.

I think generally, operators are trying to keep out what they've got out.

The ones we've talked to, and the things we've seen--I think they're generally trying to stay out there.

And I've actually been pleasantly surprised with -- based on how low the gas price has gone as to how we've been able to maintain utilization.

So I think the operators are trying to stay out there.

Certainly we're trying to doing everything we can to assist in that by keeping that equipment there and having some other equipment available to go.

Right now everything seems to be holding together although the threads holding it are probably getting a little stressed.

Unless we have a much steeper decline going forward we'll probably be able to muddle through.

(Inaudible) because you mention the pricing in various areas like Iran (inaudible) in the past you can selectively throw in some pricing increases in there.

I guess that would be tough to look at this year on that side.

Yes.

I don't think we're going to have any price increases this year.

It's in the environment to do it.

We've had good luck in the past and primarily just because we've got good service network out there That's actually going to be the thing.

We're going to cut back on expenses.

We're not going to cut back on our ability to respond to customers and to maintain our equipment.

We'll be very prudent in where we cut expenses or conserve our dollars.

But we do intend to maintain the service capability.

That's what's actually keeping our utilization at a decent level nowadays.

All right.

Then last question.

If your credit resists through the last up cycle and even prior to that, adding externally -- have people approached you on acquisitions, is this type of environment obviously -- your financials look quite good.

If you're approached or are you being approached, would you consider anything external-- against the mom and pop shops approached you, would you consider adding that way?

Or is it just because of the demand, you just wouldn't have any interest?

Again.

I think just as we've been approached in the past, we would look at some of the fleets or some of the compression or gas-oriented businesses that might make sense to us.

But the -- our discipline that we've practiced in past will continue to do in the future and probably just be a little more cautious about it just because of the environment we're in.

Not because of where we are.

But the whole environment.

So we're not -- based on where we're from the balance sheet perspective, where the operations are, and our continuing access to credit, we'll still look at things if they make sense.

We'll take a look at them.

We haven't, -- obviously we haven't pulled the trigger on anything yet.

We're constantly getting approached and looking at things.

And if something makes sense -- we'll apply the same things--are the metrics right for us from an evaluations standpoint is the operational integrity of equipment rights to fit our fleet.

Got it.

Got it.

Thanks for the great quarter.

Okay.

Thanks, Neil.

Our next question comes from Joe [Gibley].

Thanks, good morning, Steve.

Just want to follow up a little bit, just a point of clarity there on the call.

Did you indicate your compressor sales were $7.1 million in the quarter, is that correct?

Yes.

Okay.

Sou your parts and rebuilds still trending a little bit higher?

I know typically this runs 15%, 20% of your compressor sales.

You commented there on the rebuild repair emphasis for some of your customer base.

Do you think that holds as we work our way through?

You've been running around $2 million or so per quarter for the last couple quarters in the segment?

Yes, I do think it will hold in there.

And probably become a larger piece of that total sales.

We do expect softening in the compressor sales.

Okay.

Just touching on mix within compressor sales, I know you guys have the capability to build it up to about 1,500 horsepower in Tulsa.

As we degrade down here on the sales side, are you seeing a little bit of a mix shift, more higher horsepower, or how is that playing out--how should we think about the margin side which is running mid-20s still?

Well, the mix is staying about the same.

I don't anticipate seeing too much difference there.

Margin wise, I think if we can stay in the low to mid-20s, I think that's a heck of an accomplishment for a year like this.

So we'll play it as we go.

We'll stay competitive and -- we think we have a good enough product that we can still deliver industry beating margins in that respect.

And kind of interestingly, the inquiry level on the sales piece is still seeming to hold up.

Now, it's's taking longer for Bill to make some decisions but there's still seems to be some modicum of activity out there.

Okay.

Then circling back on the pricing side for the rental fleet.

You pushed through that 2,600, 2,700 in August.

Seems to be holding up a higher horsepower mix.

Are you getting price concession demands from your customers?

I know you indicated no impetus for pricing increase this year.

But should we be thinking about your rental rates and revenue per month holding flat in this environment?

Or do you think it will degrade a little bit?

Well, I think we'll get -- we're getting pressure and we're -- if you look at our customer, operator, their product price has come down about two-thirds.

And I think it's come upon all of us to work on all of those situations.

And I think it's not realistic to expect that we can hold across the board totaling what we've got.

So we're getting some price pressures.

We're working with some customers on what we think we can do in some of this.

They're not drastic approaches-- we're being -- people are taking with us.

And again, I think it all comes from what we've been doing in the past here.

Building a good service network and good equipment out there.

I think that -- although there's--operator need some with some of these things, I think we're get something preferential treatment just due to how we operate and run our equipment.

All right.

And last one just the final rental fleet count press release, 1,730.

But you indicated a little bit higher.

What was that number?

And the period?

What did I have here?

Let me find it.

Well, we built 399 units in '08.

So the difference -- what was built-- what ultimately was in the fleet.

Okay.

Understood.

Appreciate it.

Thanks I'll turn it back.

Okay.

Thanks, Joe.

Our next question comes from [Gary Farber].

Yes, thanks.

I just had two questions.

Can you talk about what you're seeing from your competition, some of the smaller competitors that you're seeing in the market.

And what you think the financing outlook is for them?

You have good liquidity, but I'm wondering if some of your competitors don't and that might be an opportunity for you.

Yes.

And of course we get a lot of anecdotal information on that because some the smaller guys aren't public.

But yes, there's some problems out there.

We've heard of some pretty large layoffs from some people.

Some people have some trouble with cash.

Some people have some trouble paying bills and thing like that.

And that's -- that is certainly not unusual in a period like this, when you get some of the smaller guys.

Playing in it-- so we are hearing some of that.

Certainly we think there's opportunities there that we can take.

Not just from the regular business standpoint.

Maybe otherwise.

But, again, we have to be very careful there.

And what was your second question, Gary?

I guess just their financing.

You have plenty of capital.

Do you think they're going to get -- do you think these people are going to be more constrained and that's an opportunity there, as well?

I think they will be constrained.

We've heard a couple of situations like that.

From smaller players than us and some not very much smaller.

Depends on how they built the business and what they've done.

But a far amount of these guys have used a lot of debt and, of course, that -- the product margin like this, stays level and equity goes away.

I think there's some issues out there.

And we'll see how they pan out.

Imagine as we get into second, third quarter, we'll see a little bit more of that start to show up and some of the cracks start to become apparent.

Do you see pricing as an issue in any of your bidding--either rental or what do you call it, sale, relative to your competition?

In that environment there's a competition, are they giving up on price more than you think integrating in a more difficult environment?

Yes.

Competitors and one or two in particular are, doing what I think are some silly things.

We watched that.

And if we have to appeal some of that-- we'll make decisions whether we do or not.

We intend to certainly stay with our good customers.

And our good customers typically don't come in wanting real radical changes.

So that's -- those aren't the issues.

The ones to really look at pretty close are somebody's -- if we get in a competitive situation on some smaller things or some things that are not strategic or things like that.

We're not too worried about those.

We'll maintain our share and we'll fight for what we want.

But we're not going to be silly about it either and we think some of that's going on in some markets.

Right.

Okay.

Thanks.

Thank you.

Our next question comes from [Mike Drickamer].

Good morning, Steve.

Hey Mike.

Last quarter you commented that one of your biggest problems is the same problem that your customers have, and that's no visibility.

Is that still a problem, or are you starting to see more visibility?

Well, no.

I think the visibility has come out, it's just all down.

Three months ago hardly anybody released their capital budgets.

Now about everybody has.

And --

And then revised them down 12 times.

Yes, exactly.

Not a single one has a plus sign in front of it.

So I think that visibility there has become better, but again, you can't -- as you said, the revisions are continual, too.

So it's real hard to really put your finger on something.

That's why we've slowed our rental fabrication way down.

We don't think we're going to need to add a whole lot to the fleet this year.

Our intent is to maintain what we've got.

Maintain what we've got in the working inventory, and approach it like that.

Use existing equipment that we've got.

If we need to modify something, we'll do that instead of building.

So just pull back into a defensive position from that standpoint, but stay offensive from the point of sales and marketing efforts.

Did I understand you correctly earlier when you answered one of the questions that previously that you said you could build 200 compressors this year, but right now you're on track to build less than half of that?

Yes.

So you could add 100 or less compressors in 2009?

Yes.

Again, the 200 was based on what we thought we could build just with cash, free cash.

Just not to add any more debt.

Right now, based on what we think and see, yes.

It would be less than 50% of that.

And again, if some of the prognostications come and we get some uptick in the third and especially fourth quarter with a good winter, that could go up and the main thing with us is we're in a position to take advantage of any upturn.

I mean, we've got--we've still got crews, we've got skeleton crews, we've got a good amount of position of working inventory.

So we've still got some equipment we can put out without really spending a whole lot of money on doing anything.

Yes, as we see it right now, we don't see a big add this year to the fleet.

But if things turn and we need to ramp up, we do that fairly quickly.

So just for clarity, to make sure I understand correctly.

What is driving the lower add?

Is it the lower cash flow expected now, compared to three months ago, or is it you just don't think you will have the demand in the industry to push out 200 compressors.

Demand.

It's demand driven.

And then you also commented that utilizations holding in flat, around 85%.

How long are the compressors, the newly fabricated ones, sitting in New York before they head out to the field?

Well, that's slowing down.

Probably in the past year or two, it -- relatively better times you always have some in the yard a little longer.

But they would probably-- in the yard, average three to four weeks.

Now when we put a new one out it's--it could be there a couple of months before it goes out.

The growth has slowed, which is what we anticipate and what anybody anticipates in this.

And in fact it's -- we're about hanging in even-- you always get turned in this business.

You always get some out, get some back and put more out and when you grow of course you put more out than you are getting back.

I think in this year, in this environment to maintain utilization we're at or even --a little deteriorization is going to be a positive.

Now if you look at the demand are you seeing, is there any change in the horsepower requirements within that demand -- is it higher than you've previously seen or lower than you've previously seen?

It's probably about the same.

If I had to pick one, probably trending just a little bit higher.

I think I gave you numbers last year as to our fabrication has trended higher from a build standpoint versus what our average horsepower in the fleet was.

And that's continuing.

Our average fabricated horsepower is about 145, 150, our average fleet is about 130.

For the past two years we've trended up in horsepower.

I think that's continuing.

Some of it's operating characteristics.

Some of it is the wells the operators are drilling.

And some of it's just --we're tending to build some bigger units.

And trying to go after that market more so too.

How regularly do you look at the industry and look at your cash flows in deciding how many compressors you're going to add to the fleet?

Is this something you do monthly, quarterly, weekly, daily?

Closer to daily than weekly or monthly.

We're really budgeting and watching closely cash flow.

We don't want to get out of bounds on that if we have an opportunity to do something.

So we watched that, but the overriding factor is the market.

And if we see the market taking up and we think there's some opportunities out there to get some more business or grow a bit.

We'll go ahead and do that.

Again, we've got the ability to -- either through cash flow or going to the bank, to take advantage of those opportunities.

If we see the markets slowing down more, we'll slow down more, too.

So the market is the primary guide, and then we'll look at how we're going to pay for this stuff or what we're going to do.

Okay.

And then, Steve, I think one of the main concerns of investors with your stock is that you may have this wave of compressors coming back as (inaudible) shut-in wells.

You said earlier that you are seeing some compressors come back as parts of regular business.

Can you provide a little more color there?

Are you seeing a lot of it coming back?

How many more are coming back compared to what you normally see?

Are there any geographies you are getting a lot of them back from?

No.

Well, again, our utilization has been 85% in Q3, Q4, and it's 85% in January this year.

Some are coming back but the same amount are going out.

That's staying even from utilization.

And we're adding a little each month.

We're actually gaining just a bit.

We haven't seen anything to this point that's from the data that's more or less.

Now, again, I think I've said this in the past -- I would fully expect some declining utilization, as we go into the summer months, we typically get that anyway a bit.

Just some are just a little tougher from a gas price situation.

We can see some softness in the position going forward.

But we watch that pretty close and the market drives us.

We also watch that for utilization pretty close.

We want to keep it reasonable.

And again, if we can maintain it in the 80's, I think that's a good deal.

To this point, Mike, we're not seeing anything other than what utilization indicates.

Just some are going back, same amount are coming back.

In addition to the builds we're growing just slightly in that respect.

Now, again, we -- this is a month-to-month thing right now.

I think we've just got to stay pretty close to it and diligent.

And we'll adjust the business as the market and/or utilization dictates we need to.

How about geographically.

Is the San Juan area still your largest market, followed then by the Barnett?

No.

Barnett's been the largest really about a year and a half now.

And then San Juan.

Those are still the two largest.

Michigan is the third largest.

Right now they're still some activity out there.

This is not the same activity we had last year or the year before.

I don't want to say that.

But it's still enough to where we've got the full fleet and full force of people and everything else and staying busy out there.

Okay.

Even with the concerns about the Barnett right now and whether or not it's economic at the current gas prices, you're not seeing a wave of compressors coming back from that market?

We're not seeing any more coming back than are going out.

And now whether that's an even thing between the customers we have or whether we're making some additional penetration with new customers-- it's probably a little of both.

Right now as it sits, everything is staying even.

Again, as we go into Q2, Q3, and we could still get some softening gas price.

And that's what drives this whole business.

If we see more softening there it wouldn't surprise me if we have some deterioration and utilization.

The main thing we can do is-- again, we've already pulled back the fabrication so we can maintain utilization where we want it.

And I think that's been one of the criticisms in the past in this business, that compression companies tend to build, build, build (inaudible).

And we're not doing that.

We want to pull back and try to temper where we're doing to maintain our share and place in the market.

But there is going to be -- there is, there will be more price pressure.

There is, there will be more pressure on utilization.

There is and there will be more pressure on margins.

That's the world we're in.

There's nothing I or any of the guys here or girls here can do about it.

The best thing we can do is anticipate it, adjust as quickly as we can which I think we've done certainly to this point.

And muddle through '09.

I think '09 is kind of a muddling year.

I don't think it's going to be anything spectacular up or down.

I think we're -- we know how to operate in this business.

We certainly know how to operate in good times.

I think we've shown that.

I think we're starting to show we know how to operate in the bad times.

And-- so we'll just -- we have to be aware and stay on top of it.

And do the best we can.

And again, I think we'll end up in the past three or four years, everybody grew but we grew the fastest.

Nobody could touch our margins and our shares.

And I think we'll -- I think the whole industry gets reset a little in a year like this.

But we'll continue to be in the top piece of that.

Thanks a lot Steve.

Thank you, our last question comes from Steve [Ferazani].

Morning Steve.

Just talk about the size of the rental fleet outside of Barnett and now are you moving forward with the plans?

or is there a slowdown in the geographic expansion plans given the current market conditions?

Well, we're not going to -- we don't have any current plans to move into new areas.

Our plans were to consolidate in the existing areas.

Of course, Barnett and [Farnsworth] could be the biggest.

Represent little --as Mike's question before was (inaudible) one of the things like that.

And in parts of Farnsworth and San Juan we have such a large number of compressors and such a density of -- we can make decent money in those markets, in a lot of respects no matter what the gas price does and operators run into.

Density and response time is a little better for us out there.

Michigan's about the same way.

It's a good market for us, surprisingly.

It's not a big market.

But we've got a commanding share.

The newer areas, the Rockies and Appalachia, I think we're not--we hadn't gotten real big in those at this point.

So this slowdown shouldn't hurt our overall results.

And those aren't big pieces of the pie yet.

We've moved into them 18 months ago intending to be a long-term player.

Our plans are still, we've got all our people there.

Our plans are still to get what we can get.

But I think those market would generally deteriorate quicker.

The Rockies always does.

But if it does, so be it.

We're not as big in those and we can weather that and be ready to go back in.

Post '09, obviously you try to maintain cash here, but post '09 it doesn't seem like the Barnett and San Juan basin, necessarily are going to be big growth areas post '09.

So do you have to position yourself now to get more aggressive in those other spaces as gas prices rebound?

Yes.

Well, again, we are there.

So it's not a matter that we're not there.

And may have to move in.

We've already got equipment in Appalachia.

We've got equipment in the Rockies.

We're already there.

And we'll be ready in '10 or the end of this year when things pop back, and things like that.

So I think we're still in good position there.

We still think there's probably not as dramatic growth in the Barnett as in the past or maybe in the San Juans as in the past.

We think there's still good growth for us.

And some of that's market share, taking away from the competition which we've been able to do.

Some of these areas.

And some of it is just-- there's still a lot of potential in the Barnett to do things.

We think still the areas we're in will be good, long-term growers over time.

The newer areas, Appalachia, the Rockies, we're there, we can grow as required.

And we're close enough-- if you look at -- we're very strong in Barnett obviously.

But if you look at within 200 miles, we have Barnett, Arcoma, Fayetteville, east Texas.

Probably half the rigs in the US are within 200 or 300 miles of Dallas.

It does not take a whole lot to move into those areas if we need to.

We've got a lot of people around there already.

We just -- stationed the guys somewhere, build something where, do this or that.

But we think we're positioned well in the areas we've identified.

Certainly as things pick back up we can consolidate those, grow those a bit more.

And resume some growth in other areas.

Okay and on the pricing issue, maybe some pressure on the sales side.

Have you turned around to your suppliers yet trying to get price concession s?

Oh, yes.

You know the old saying, it all flows downhill.

Yes, we're trying to work with them from the point of what they can do.

Concessions, terms, things like that.

This is truly something that everybody's in.

At the same time the operator, to us, our supplier.

So it's a whole food chain.

Everybody's got a to reset a bit and get through it.

Thanks a lot, Steve.

Okay, Steve.

Thanks.

(Operator Instructions)

Is that it, Michelle?

Yeah, it looks like we have no other questions on queue.

Okay.

Great.

Listen, I appreciate everybody --

Pardon me.

We did have one question but he dropped out.

Pardon the interruption.

Okay.

Okay.

That's it?

Yes.

Okay.

Great.

Thanks Michelle.

Before I close, do want to thank all of our employees for obviously not just for the continued work this, is a tough time.

For everybody.

And it's hard on us all.

And not knowing exactly where we're going.

I think we've got a good crew here.

We're going to be able to get through this thing.

I do want to make sure all the employees know they're very much appreciated for what they do.

I thank you, everybody, for joining me on the call and look forward to visiting with you again next quarter.

Thank you.

Thank you very much, Steve.

Ladies and gentlemen, thank you all for attending and have a great day.