Natural Gas Services Group Inc (NGS) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group second quarter 2009 earnings release and conference call.

Your host for today's call is Kimberly Huckaba, Investor Relations Coordinator Contact.

(Operator instructions) Following the presentation, you'll be invited to a live question-and-answer session.

I will now turn the call over to Kimberly Huckaba.

You may begin.

Thank you, Erica, and good morning, listeners.

At this time, if you would, please allow me to read the forward-looking statement.

Except for historical information contained herein, the statements in 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 expectations reflected in the forward-looking statements include, but they 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.

Thank you, Kim.

Thank you, Erica.

Good morning and welcome to NGS's second quarter 2009 earnings review.

If you saw earnings release this morning, we posted second-quarter earnings that we think, particularly in this difficult operating environment are very good.

From a highlight standpoint, our gross margin dollars were higher this quarter than the comparable year-ago period.

We maintained net income at the same 17% of revenue level, and EBITDA was off only about $100,000.

Diluted earnings per share came in at $0.24 this quarter compared to $0.27 a year ago.

For the six-month comparable periods, gross margin, operating income, and EBITDA were all higher this year than last.

The story this quarter is much as we had predicted, a very tough and competitive environment, especially in our fabricated sales business.

With pressure on [rental] utilization, [we had a] relatively robust rental segment with very good cost control, margin expansion and market penetration.

Now, comparing total revenue, the second quarter of '09 was $16.8 million, which is down from $19.5 million in the second quarter of '08.

The sequential decline was just about the same.

It went from $20 million in the first quarter of '09 to $16.8 million in the second quarter.

The largest part of this revenue decline in relation to softness in our fabricated sales business, which we predicted and expected.

Comparing gross margin from the second quarter of '09 to the second quarter of '08, it grew to $9.2 million or 55% of revenue, from $8.9 million or 46% of revenue.

This is a 3% year-over-year increase in gross margin dollars.

But just as gratifying is that the gross margin to revenue ratio grew from 46% to 55% currently.

This is due to excellent cost control and a shift of our revenues and margins towards rentals relative to sales.

Although the gross margin dollars this quarter were not a record, the 55% of revenue ratio is.

Sequentially, gross margin declined from $10.6 million to $9.2 million.

SG&A expense was $1.5 million in the second quarter of '08 and $1.7 million in the second quarter of '09.

As a percent of revenue, SG&A grew from 8% to 10%, but this is a phenomenon of a calculation largely driven by declining revenues, not increasing costs.

Sequential quarters experienced the same level of increase.

Our net income after tax, comparing the year-over-year quarters, net income declined 14% from $3.3 million in the second quarter of '08 to $2.9 million in the current quarter.

But we did maintain both at 17% of revenue.

Sequential quarters experienced the identical dollar and percent decline, but also maintain the same 17% of revenue profit level.

The second quarter of '09 EBITDA declined 2% from the second quarter of '08, from $7.6 million to $7.5 million, but it did increase from 39% to 45% of revenue.

It's interesting that this is a record level of EBITDA relative to revenue.

Sequentially, EBITDA went from $8.9 million in the first quarter of '09 to $7.5 million in the second quarter of '09.

But we maintained it at the 45% revenue level in both quarters.

Our fully diluted earnings per share for the second quarter of '09 was $0.24 per common share.

Total sales revenue, which consists of custom fab sales, flare sales, parts sales, rebuild, and compressor sales, this is the portion of our business, due primarily to the rapid fall off of direct compressor sales that has suffered the most in this environment.

I've always mentioned that this is the most vulnerable part of the business in a downturn, and now, not only are we getting the negative effects of the energy industry trough, but it is compounded by the tightness and/or lack of credit.

Both affect the purchase of large capital equipment in all sectors of the industry.

Total sales in the second quarter of '08 were $9.2 million compared to $4.6 million in the second quarter of this year.

Sequentially, total sales revenue decreased from $6.9 million to $4.6 million, although we were able to maintain gross margins at 29% in the current quarter.

Compressor sales alone were $7.8 million in Q2 '08 versus $3.1 million in the second quarter of this year.

And they were $5.2 million in the first quarter of '09.

Compressor sales margins were 22% this quarter versus 28 to 29% in the sequential and comparable year ago quarters.

This, of course, reflects the competitive environment, but we do continue to post industry high margins in this business.

The compressor sales backlog at our fabricating facility in Tulsa at the end of the second quarter of '09, was about $5.2 million.

This compares to $8 million in the first quarter this year.

Looking at compressor rentals, rental revenue grew 19% in year-over-year quarters.

The second quarter of '08, revenue was $10.1 million.

It grew to $12 million in this current quarter.

As a percent of revenue, the gross margin in the second quarter of '09 was 65%.

This is up from 63% in the first quarter of this year and 59% in the year-ago quarter.

We are obviously pleased with this and, in fact, if you look at an average rental fleet unit and compare December 2008 to June 2009, we increased our average rental revenue by 5% and decreased our expenses by 14% per unit.

It's obvious that we' have been able to maintain pricing, control our costs, and increase our margins in this environment.

I want to commend our employees, not only for their [economy] but also their implementation of some new and innovative field operating practices.

Rental revenue decreased sequentially from $12.8 million to $12 million for the current quarter, a 6% change.

The rental fleet had essentially no growth this quarter.

We built 70 units, but sold five out of the fleet, and, therefore, added only two new net compressor units.

That brings the total fleet to 1,771 units.

We ended the second quarter at a rental fleet utilization rate of 76%.

Although this is down from last quarter's utilization of 82%, we actually gained market share in our targeted markets in each quarter over the last year.

This means, of course, that our competitors are having tougher utilization issues than we are.

Our share of the 50 to 500 horsepower market in the areas we operate is currently 17.8% compared to 16.5% at this same time last year.

From a balance sheet perspective, our liquidity continues to be very strong, is getting stronger, and our capital structure enviable.

Our total short-term and long-term debt is $15.4 million as of June 30th, 2009, including $7 million drawn on our $40 million line of credit.

Total debt to total cap is running about 10%.

And with our net debt of $3.8 million, our net debt to total cap is about 2.5%.

Our debt to EBITDA ratio is 0.43.

Our cash flow from operations was $11.1 million this quarter compared to $5.3 million in the year ago quarter and $5.8 million last quarter.

Our cash on the balance sheet was $11.7 million on June 30th of this year, which is a $9 million increase during the quarter.

Capital expenditures in the second quarter this year were $1.4 million.

$1.3 million of that was for rental fleet equipment and about $100,000 for continued emissions retrofits, which brings our total CapEx for the year to $7.2 million.

As mentioned in the last call, I doubt if we see $10 million total capital for the year.

During the recent year some valuations of competitors or available fleets are running very high, and just looked at but did not pull the trigger on any acquisitions.

We are a "cursed" with operating a high-margin business and just didn't see anything that would enhance shareholder value or improve our competitive position.

But we are now seeing some interesting opportunities in the market.

This is obviously a tough environment and we're not through it yet.

The roughest parts are -- roughest spots are in the fabrication business for us and others.

Though we knew that would be the case, we don't see much improvement there in the near future.

Rental is a bright spot, but it's still tough and we think Q3 could be the roughest quarter of the year.

We expect a Q3-Q4 trough with a Q1 2010 upturn, but this is all dependent on a macroeconomic recovery and attendant demand.

But the problem with [prognostifications] now is that there are no clear signs one way or the other.

You can find bright spots and black holes, it just depends on the day and what you are reading.

Some of the bright spots, gas [recount] has turned a bit and maybe it's bottomed.

Commodity prices stabilized some and maybe that too has bottomed.

Recent gas storage injections are lower than last year and we are seeing some slight indications that supply has peaked.

LNG imports have not materialized as anticipated and Canadian imports are down.

The black holes.

Storage levels are historically high, pricing is low, demand has fallen dramatically, we have had very mild weather, and the macro-economy is not firming up yet.

After reading a number of contrary analyses each day I tend to develop multiple personalities.

But all this really tells us is that two of the largest swing factors in the use of natural gas in the US, industrial demand and weather, continue to be unpredictable and uncontrollable.

However, we remain optimistic.

We have just completed three quarters of this downtrend, and, although we, like all others, are seeing declines in our businesses, we have been able to report some of the highest if not the highest margins in our industry.

In a market like this, there isn't too much that can be done about commodity driven declines.

But what we can control are our costs, we're doing very well in that regard.

I'm optimistic about our business whether it's short-term or long-term.

Do I wish I had a little crude oil in the portfolio right now?

Sure.

But that doesn't change my outlook for natural gas.

We set material parts of our strategy three to four years ago and three components were, we want to lower our debt.

We started that in 2006.

We are now in an enviable position in that respect.

We wanted to increase our rental revenue component of our business.

Through 2008, we were progressing on that and then, of course, this market accelerated that shift.

And finally, we'll want to grow our margins through revenue growth and cost control.

We have and will consistently earn high margins in sales and rentals.

We've hit the mark in all these and it makes all the difference in a market like this.

Many strategies work in [other] markets, but only most robust ones work in all market and we think we have one like that.

We have been convinced that our business model and market focus will drive exceptional growth in margins and that continues to be reinforced.

We have delivered profitable growth in the past and we have the same expectations for the future.

As this industry recovers, and it will, we think our bottom-line growth will be even greater than what we have delivered in the past.

This will be primarily because of the cash position we will have, the market position we are staking out, and the minimal capital we will need to fuel our recovery.

We will be able to redeploy existing assets long before we have appreciable capital need for the rental fleet.

From a political perspective, I always limit my comments to industry topics and that's proven to be a good strategy.

Otherwise, if I had to get into healthcare, Cash for Clunkers and other policy clunkers, we would be here all day.

I want to make a few comments about the ill-fated and the reckless push for renewable energy, not from the point that we shouldn't pursue renewables, but that what is being pursued has ruined us.

For example, the renewable fuel standard proposed by the EPA in May of this year mandates the use of 36 billion gallons of biofuels by 2022, with 15 billion of that being from cellulosic ethanol which is derived from corn starch.

To produce the required amount of corn to make this ethanol will take 39 million acres of farmland, of which, on the average, about 14% of that would be irrigated.

This represents 60% of the land presently dedicated to growing corn and takes the irrigation equivalent of one-third of the annual flow of the Colorado River.

What is our return for this huge consumption of a different type of nonrenewable resource, that being land and water?

We displace only 7.5% of the US gasoline supply, neither, in my opinion, environmentally sound or sustainable.

The present Administration has also proposed that 25% of our generated electricity come from renewable sources by 2025.

With the majority of corn and cellulosic ethanol being potentially consumed for liquid fuels, utilities are having to look at wood as a fuel for plants.

Wood.

I laugh only to keep from crying because these people seem to be serious.

Assume that we can get past the notion that burning wood just doesn't seem like progress, it would take 29% of our commercial timberland to generate 5% of our electrical needs.

If you thought environmentalists were concerned about road construction in national forests under the last administration, you ain't seen nothing yet.

My intent is not to bash this Administration.

But the direction and policies being pursued are not based on achievable goals or scientific realities and we will have deleterious second and third order effects.

If we really wanted to improve our global environment, we should start by encouraging China, Russia, and India to agree to environmental restrictions which they recently rejected, and we should start to responsibly develop the vast natural resources we have with natural gas being at the forefront.

To summarize, I'm pretty optimistic about the natural gas industry, our markets and our position in it.

It's not a fun time right now.

But just as we took advantage of a growing market, we will do the same in a declining one.

That's the end of my prepared remarks.

And I'll now turn the call back over to Erica to open the new lines for any of you that may have questions.

(Operator instructions) Our first question comes from Gary Farber from CL King.

Please state your question.

Okay.

Yes.

Good morning.

Hi, Gary.

Hey.

Did you say up front on the call, I might have missed it, were you talking about acquisitions, possibly, on the front end of the call?

I just said that we had looked at a few of them in the past.

But, of course, as I'd always, you know, had the question answered that they were typically pretty expensive but there seem to be other opportunities popping up now in this declining market for -- where evaluations are getting much more reasonable.

Nothing on the table.

There's just things --

Right.

-- coming up that we hadn't seen before.

Okay.

And then I don't know if you commented also on just the general competitive environment.

What are you seeing from the other players out there in the industry and how they're dealing with the downturn?

Well, I think it's like probably any part of the industry, you get some that panic a little more than others, I think.

I think you got some rough pricing out there in some of it and some areas and some competitors that seems to be a little more calm and collected.

And that's not unusual in a market like this.

I think you get some that just get in a little tougher shape and feel like they need to buy share in some respects, and then some that aren't in as bad a shape and kind of lay back.

I mean, I think I mentioned last time we're seeing some competitors with some cash flow problems and that tends to drive them to be a little more aggressive.

Right.

Okay.

Thanks again.

Okay.

Thanks, Gary.

Our next question comes from Joe Gibney from Capital One Southcoast.

Please state your question.

Thanks.

Good morning, Steve.

Hey, Joe.

I appreciate the Cash for Clunkers commentary there.

It's pretty amazing.

Reconciling with your commentary they on kind of the third quarter trough and then expectations for the first quarter upturn.

I understand a lot of variability behind it relative to gas.

But could you calibrate that with the fabrication outlook?

Does that imply that we're kind of -- at least the bleeding's stopping at this level in fab?

[Albeit] maybe not going anywhere in the near term, but pricing and order flow, which just kind of holding at this rate?

Or do you think it could turn down a little bit more relative to your third-quarter directionality?

Well, I think, as I say, I think Q3 is actually going to be the roughest quarter of the year.

I think that it's just natural and normal.

We're at the end of the -- we're on the shoulder going into winter.

So it's -- we're going to be building stores to a high level, pricing's going to be -- gas pricing could potentially come off just a little bit more, I don't think a whole lot.

But it's just a natural thing that occurs every year.

So I think Q3 could still be a rough quarter.

So from relaying that to the fabrication piece of it, I think we'll continue to see some pressure on that.

The thing with fabrication is you do have a sales cycle there that takes a little longer than rentals.

From a rental thing we'll see recovery pretty quick on rentals just because we've got some underutilized assets we can put out right away.

From a sales perspective, you'll have the cycle of operators getting ready to go out and buy stuff, putting out bids, getting them ordered, getting stuff ordered and built.

Not as bad as it was a year ago when engines and compressors were in short supply.

I think there's plenty of those around.

You could have a -- even from a definite upturn in that business, you could have a quarter lag just until things start rolling through.

Okay.

And one more, if I may.

Just curious on your expectation for build rate for the rest of the year, you reiterated kind of that 10 million ceiling on CapEx.

How should we think about fleet additions back half of the year on the rental side?

I just think that they're going to be probably -- they're won't be seven to 10 units a quarter added.

I mean, we added -- well, we net added two, we built seven.

And typically in the past we were very reluctant to sell the fleet.

But right now there's -- we have some equipment we can do that with.

So if we did, what we did $1.3 million in compressors this quarter.

If we do that the next couple quarters, that puts you right into that 10.

So I don't really expect more than what we're seeing this quarter.

Okay.

Good deal.

I appreciate it.

I'll go stock up on some wood here.

Yes.

(Laughs)

Thanks.

Our next question comes from Mike Drickamer from Morgan Keegan.

Please state your question.

Morning, Steve.

Hey, Mike.

Any chance the Midland Senate seat's open?

Wow, we got a senator here?

We should.

Who do I send my resume for the exploratory committee to?

No, not a resume.

We'll probably want cash.

Oh, is that what it is?

Yes.

Well, in absence of cash, then how about a couple questions for you?

All right.

All right.

If you see an upturn in early 2010, are you going to have to start increasing your order flow for engines and compressors late this year?

No.

Again, we've got equipment on the ground that we can put out pretty quick.

We've got inventory we can build with.

There's always spots.

I mean, you can sit there with equipment sitting in yards, and there's always going to be some stuff you've still got to build and plug some holes with.

And we've got certain types of equipment that's pretty well fully utilized right now.

So if more of that comes, you have to build some.

But it's not near the pace we were at the last year or so.

So I don't -- anything we order is going to be very, very minimal.

Okay.

The five compressors you sold during the quarter, where did that flow through on the income statement?

It's in the sales revenues.

So it would have been much -- or how much worse would it have been had you not sold those five compressors then?

I think that was about five or $600,000.

What kind of margin did you get on those then?

Those -- on those, we're getting 20, 25%, right inline with just the overall sales margin.

Okay.

You talked about domestically -- or there are some interesting opportunities out there for acquisition.

Is it safe to assume that that's primarily on a rental fleet addition side?

Or are you looking at any fabrication?

No, it wouldn't be fabrication.

It'd be more associated with gas compression from the rental perspective.

Okay.

Last one for me.

Rental margins did come in stronger than expected, at least relative to my numbers it was on lower-than-expected operating costs.

Is this something that's sustainable at these higher levels, the lower operating costs?

Yes.

You know me, I hate to say that.

Well, you gave your crews a big compliment there.

I just want to see if it's sustainable here or if there's something extraordinary in the quarter.

Well, nothing real extraordinary, but every month your margins vary just a little.

Sometimes you have more rebuilds in the fleet and things like that.

So we -- I'm going to say it's -- I mean, that's pretty much of a record.

It's hard to maintain a record quarter-in, quarter-out.

But we think we've -- well, we have implemented some different practices and some changes in some procedures in the field and some people, things -- not people changing it, but just different way to run some stuff.

So those ought -- and they actually came in and contributed quicker than I anticipated.

So we think they're price sustainable.

I'm not -- you know no guarantees here.

I would -- I'd be much more comfortable if you asked me 63%, since 65's the record.

Okay.

When compressors come in needing to be rebuilt, are you actually rebuilding them now or just stacking them out by the fence?

It depends.

I mean some of them were -- if we've got plenty of them that are ready to go, we're not worried about it right now who got -- if we have some that come in that are relatively -- have a relative high utilization rate, we'll go ahead and get them ready.

The one thing we don't want to do is when things do turn up, have to just sink a whole lot of money at once or be behind the curve or something like that.

So we're kind of managing that.

It's not an automatic decision no matter what comes in whether it is or isn't a rebuild.

Okay.

So you're not necessarily just kicking the can down the road here?

I'm not familiar with that colloquialism in this respect.

What do you mean?

Just making sure you're not deferring those operating costs at some point in the future so that when things do turn up you have a big slug of operating cost you got to take there.

No.

I mean, there are -- yes, when things do turn up, that cost will go up just obviously because it always happens and the expense always leaves to that revenue.

But no, it's not going to be a deal where, to use another one, steal from Peter to pay Paul.

There you go.

All right, Steve.

Thanks a lot.

All right, Mike.

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

Please state your question.

Morning, Steve.

Hi, Steve.

I know you run an awfully lean operation, but a little bit surprised you can't pull anything out of SG&A given the weak environment.

Can you comment a little there?

Well, I mean, we've -- we look at that constantly and we've lightened up there just a little bit.

But even at 10% of revenue, that's still relative to competitors a lean amount.

I mean, the problem we get into, I mean, we were running 7 or 8%, which is about half what people were typically running.

So not only were we lean, I mean you're kind of at a level where you can't go up or down too much in your transactions and things like that.

So that was in a -- that 7 or 8% was certainly as low is you could go and we can handle, as revenues fall off, you still -- you don't get a whole lot of change in some of your back office requirements.

So I don't think we're going to see a whole lot of change in that from a percentage.

I mean the dollars didn't change a whole lot either.

And some of what we saw in Q2, if you compare it to Q1, our proxy cost, annual meeting cost, and things like that.

So there's a little of a artificial bump at Q2 relative to Q1.

You know utilization's above 70% at the end of the quarter, obviously extremely impressive given how quiet the Barnett Shale drilling market is.

At what point does drilling need to pick up?

And I know -- I'm sure you're picking up share here.

But at what point, given the wells that are producing, how much lag is there where as if activity in the Barnett does not pick up you could see a dramatic decline in utilization?

I don't think -- I don't think we'll see a dramatic decline in the Barnett, per se, from our perspective.

I mean, we're -- we've got a pretty good position there.

From the point of when drilling has to pick up to maybe move utilization up, I mean anything is going to help.

What we expect is there'll be a quarter's worth of renewed upturn in drilling.

You'll get the operators starting to see positive signs and starting to do some things and everything else.

And it'll be -- there'll be a quarter lag before we start sending equipment out, when they start drilling, getting them complete, getting them hooked up and things like that.

So I don't -- I'm not too concerned about the Barnett itself, particularly from a utilization standpoint.

I think, I mean, there's going to be pressures in the Barnett and San Juan, all the other areas.

I just think we're going to continue to have that for another quarter or so.

But as far as something being dramatic or very damaging, I don't anticipate that.

The flipside is, we keep hearing about the number of Barnett wells that have been drilled but not completed.

If these wells are completed once we see the spike in price, how fast can you get the -- take advantage of that?

And are these -- is that a day one type get compression out there?

Yes.

Well, if it's -- like I say, if there -- there's wells out there that have been drilled and not completed.

There's wells that have been drilled and completed, just not hooked up, things like that.

Once an operator gets going, I mean they'll be able to get that stuff done pretty quick and they won't be waiting on us.

I mean, we'll be able to move equipment in pretty fast.

Fair enough.

Last question, just one I always ask on the call.

Is the geographic expansion position in Marcelles, et cetera, how -- where do you stand now versus three months ago?

Well, about the same.

I mean, there's drilling going on in there, of course, much like the Haynesville, people are hitting good wells and stuff like that.

But it's still going to be the same sort of timeline that we anticipate from our wellhead compression standpoint.

That drillings got to get in there, those wells have to -- there's not a whole lot of compression going in there right now.

That infrastructure has got to get built up.

So we think this drilling's going on, granted, but we don't really think it'll start good full development with full participation from all parts of the industry until the prices start getting back and really people start spending a lot of money on some infrastructure.

Great.

That's it for me.

Thanks, Steve.

Okay.

Thanks, Steve.

Our next question comes from Neal Dingmann.

Please state your question.

Morning will, Steve.

Hi, Neal.

Say, give me some idea, obviously with all these shale plays, and you referred a little bit to this, just how, you know, kind of the upside -- I guess I'm trying to get an idea of sort of needed compression, what -- I'm sure you've already looked at this.

How quick would we see that develop in the newer field like the Marcelles, Haynesville, kind of what we're seeing?

I'm just trying to get an idea of potential upside for some of these newer plays.

Well, we always generally see, and we're just using the Barnett as a model, back when the Barnett started early this decade.

From our perspective, the wellhead area, it'll be an 18- to 24-month lag before we go in there, because whether you're talking about the Marcelles or the Haynesville, these guys are drilling good wells.

They really don't need compression too much right now, they're flowing in, certainly in the Haynesville.

Marcelles is getting good wells, they're flowing.

So you don't need compression right now.

But these wells, as you know, are hitting 50, 70 percent-plus decline rates.

Not only is that volume decline, but that pressure declines at the same time.

And so it doesn't take long before the first thing that goes in is the mainline compression.

And then you start putting in the feeders from the wellhead and then putting wellhead compression in there when those wells need individual assistance.

So typically we think it's a year and a half to two-year cycle.

And that's the same way the Barnett went, I mean the same sort of thing.

And then, boy, once it goes, it's just bam, bam, bam.

Got it.

Got it.

Great and then lastly, just kind of wanted -- I think this was kind of touched on earlier.

Obviously margins continue to sort of stay right in there.

I know generally in the past years you were able to put I guess sort of two different type of pricing increases in there.

I guess would that even be looked at this year given the type of environment we're in, or how do you sort of go about looking at what to do with prices remainder of this year into next year?

Yes.

No, I don't -- no, there won't be any price increases this year.

And we'll just look at it next year.

I mean, we've been pretty prudent in the past on our increases.

They haven't been out of line or we haven't gotten rowdy with them.

And we'll just look and see how our costs start to behave and what starts to happen there.

I mean the good thing about maintaining our margins here is besides just the good old capitalistic good thing is we're -- we've adapted to a low market.

And once we get into a market that is a little more vigorous and has more growth, as long as we maintain those cost levels, I mean, heck, we'll be getting margin expansion without price increases.

So that doesn't mean we'll never look at that.

As our costs go up we've got to keep a handle on that.

But I'm very well pleased with our cost structure right now and being able to maintain that going into the future.

Got it.

Got it.

Great quarter.

Thanks, Steve.

Okay.

Thanks, Neal.

Our next question comes from [Bill Hiler] from [Ridgecrest].

Please state your question.

Yes.

Can you hear me, Steve?

Yes.

Hi, Bill.

How you doing?

Good.

Steve, I've got a couple questions for you.

First one on -- related to acquisitions.

I believe in the past your position was that sellers just were not realistic on asking prices coming off the peaks we were having in '07 and '08, you know [EV] to EBITDA multiples they were using were high in your view.

Is that where you're kind of sensing that potential sellers are starting to get more realistic in what the value of their businesses are?

Is that why you seem to be getting a little more confident that there may be opportunities?

Yes, that's exactly it.

I mean, as I said in the past, if you go back a year ago, and certainly two or three years ago, I mean valuations were high and that's fine.

There's great (inaudible) in the industry and you probably get that paid off.

But it was always too high for us.

And again we've got the curse of having a very good business and high margin business.

So some of that stuff was not going to even be accretive and there really wasn't a whole lot of reason to look too far beyond that if there wasn't a strategic impetus to do it.

So now, yes, we're seeing these values come off probably more dramatically the last quarter than the last six or nine months.

I think when you first get in a downturn people think it's going to be pretty short, then when it drags on, everybody gets a little more realistic.

So, yes, we're seeing some of that and that's -- it's no -- our frequency of what we look at is probably no different, maybe it's a little higher.

We would always -- in the past we had two or three opportunities a year and for various reasons it didn't make sense to us.

Those opportunities, there's probably a little more of them coming at us and now there's just a lot more sense to look at them.

So nothing -- I mean that comment wasn't a precursor to an announcement or anything like that.

But we just think there's some interesting opportunities out there gas or gas-related.

Okay.

And now refresh my memory.

I mean, if we look on the rental side of the industry today, I believe what, Exelon has 60% of the market, you might be around 15%.

How fragmented is it once you get beyond that?

I think there's a couple MLPs that are involved, that might be another 10.

And then is there dozens of small players with maybe one, 2% of the market or that are concentrated in certain basins?

Yes, it's very fragmented and very segmented and is exactly as you say --

To dozens of private companies?

Yes.

Oh yes, yes.

And I mean, some of them are regional, some of them are multi-regional, one or two that are national also.

But the private companies, they tend to be smaller players most of them.

Right.

And the other ones that were --

So there's just all kinds of guys out there in that business.

And the -- I believe last question for me, the amount of compression that is held in house by the operators is still the balk.

That's about, is it 60% or so of the market is still not outsourced?

Well, roughly, I think the accepted figure historically has been about 25, 30% of the market is rental.

Right.

That's -- I think that's probably still right.

Is there -- I'm trying to -- I try to toy with this.

In a low gas price environment where these operators are struggling with lower margins, service costs are dropping a bit, but are they more prone to look at outsourcing and, say use you to, you know, whether it be a new field or anyone -- to use a -- to outsource this in this environment, from your experience?

Or is it irrelevant on the gas pricing?

Well, I think you see a little more of it.

It's probably not a material effect.

We've seen some customers that used to buy in the past and now want to rent.

I think that's driven by capital, they'd rather use their capital on --

That would probably be a potential big growth opportunity, just a shift, if that ratio just goes from 75/25 to 60/40 and you --

Yes.

-- get a big -- because your margins are much better on renting than fabricating and selling.

Right.

But I --

You haven't noticed any major trend though yet?

No.

And I don't think that would materialize.

I mean, we've been waiting for that for 30 years and --

Okay.

That's more of a gradual --

Yes.

I just don't think you can get that.

I mean people tend to go one way or the other on that stuff.

And frankly, I mean, some compression ought to be purchased and some ought to be rented.

And I think that's just structurally how that -- how the business is.

Although, I mean, I've heard some talk that with the nature of these wells now, these nonconventional wells, they come on, they decline quickly, compression requirements could change a lot quicker.

Right.

It may be a lot more involved in managing the compression over the life of a well where --

No.

And you're exactly right.

I mean, that's exactly our strategy and that's why we concentrate on the unconventional plays and more at the wellhead environment, the 5,500 horsepower, because it's exactly that phenomenon that these wells come on with such a decline, they're very compression intensive.

They come on lower pressure, so you need compression day one.

I mean all of those factors you're exactly repeating the strategy we started on years ago and established our market in that --

But no -- too early to tell whether that results in a trend toward more outsourcing?

I -- just at the margins, I don't think we'll see just a wholesale change.

Okay.

All right, Steve.

Good job.

Appreciate it.

Thanks.

Okay.

Thanks, Bill.

(Operator instructions) Mr.

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

Okay, Erica.

Well, before I close, I want to again thank all of our employees for the continued work.

It's only through their efforts that we're able to grow and prosper as we have, and I want to be sure that they know that that's recognized.

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

Thanks.

This concludes today's conference call.

Thank you for attending.