Natural Gas Services Group Inc (NGS) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group announces its fourth quarter and full year 2009 conference call.

At this time all participants are in a listen-only mode.

(Operator Instructions).

Your call leaders for today's call are Kimberly Huckaba, IR Coordinator, and Steve Taylor, Chairman, President, and CEO.

I would now like to turn the call over to Kimberly Huckaba.

Ms.

Huckaba, you may begin.

Thank you, Nathan, and good morning, listeners.

If you would, allow me to read the forward-looking statement and we will plan to get on into this morning's earnings call.

Except for the 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 risk 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 all that now stated, I will turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group.

Steve.

Thanks, Kim, and thanks, Nathan.

Good morning to everyone, and welcome to Natural Gas Services Group's fourth quarter 2009 earnings review.

I want to start out by saying that we think this is a fun business, we all love it but it wasn't near as much fun this past quarter.

As you are aware we continue to operate in a very difficult and competitive market and we saw continuation of that in the fourth quarter.

Our sales business remains very depressed, and although we continued to post good margins, it was a driver of all of our year-over-year revenue declines.

Our rental business, while continuing to experience pricing and utilization pressures, did post a 5% year-over-year revenue gain.

From a cash liquidity standpoint, our cash flow generation continues to be very strong, and the balance sheet is the strongest ever.

I will go into more detail on these and other matters, and we will start with a review of our total revenues.

For 2009, total revenues were $67.8 million, down 21% from revenues of $85.3 million last year.

As I mentioned, the yearly decline was attributable to the fall in compressor sales, but all product lines, with the exception of rentals, experienced year-over-year revenue declines.

Total revenues in the fourth quarter of 2009 declined to $14.6 million from $21.9 million in the year ago fourth quarter of 2008.

Sequentially, revenues declined from $16.4 million to $14.6 million.

For the comparative year-over-year period, gross margin was down from $40.3 million to $35.6 million, a relatively modest 12% decline.

And in fact, margins moved up from 47% to 53% in the comparative periods.

Contrasting the fourth quarter of 2009 to the fourth quarter of 2008, total gross margin fell to $7.1 million from $10.8 million, but both periods saw gross margins steady at 49% of revenue.

Sequentially, gross margin declined from $8.7 million to $7.1 million, but we did deliver margins of 53% and 49% respectively.

SG&A expense was $1.4 million in the fourth quarter of 2009, and that was down from $1.6 million in the prior quarter.

In comparative years, SG&A was up a bit over $300,000, due to higher sales salaries from added sales people, and increased non-cash employee stock option expenses.

Although it seems longer ago than it was, in 2008 we built a very large number of rental fleet compressors, and a depreciation from that deployed capital was fully seen in 2009.

Amortization and depreciation was up $1.8 million, or 18% year-over-year because of this.

Although gross margin dropped only 12% year-over-year, this higher level of depreciation and amortization caused operating income to decrease 28% to $17.8 million for 2009.

From a tax standpoint, we had an adjustment on our year end estimates, which changed our full year tax rate from 35% to 36%.

But since the adjustment was taken in the fourth quarter, the rate that quarter moved up from 35% to 41%.

Comparing year-over-year quarters, net income declined from $3.1 million in the fourth quarter of 2008 to $1.7 million in the fourth quarter of 2009, and sequentially fell $900,000.

Net income declined from $15.6 million, and an 18% margin last year to $11 million this year, still holding at a respectable 16% margin.

Year-over-year EBITDA declined 15% from $34.9 million in 2008 to $29.5 million in 2009.

EBITDA margins actually increased from 41% to 44%.

EBITDA declined from $9.4 million in the fourth quarter of 2008 to $5.9 million in the current quarter.

Sequentially EBITDA fell from $7.1 million in the third quarter of 2009 to $5.9 million in the fourth quarter of 2009.

Fully diluted Earnings Per Share for the fourth quarter of 2009 was $0.14 per common share.

For the full year, EPS was $0.91.

Now looking at the business in segments, and starting with sales.

Reminding you that total sales revenue is primarily made up of compressor sales, but also includes flares, parts and rebuild revenues.

Total sales declined to $4.9 million in the fourth quarter of 2009, compared to revenues of $9.4 million in the year ago quarter.

Three-quarters of this decrease was from compressor sales.

But significantly we were able to maintain gross margins in the 29% to 32% range for both comparative quarters.

Sequentially revenues moved down from $5.3 million last quarter to $4.8 million in the fourth quarter of 2009, with margins moving from 31% to 29% respectively.

Now looking at compressor sales alone, this is the business with all of the headwinds.

In comparative year-over-year quarters, compressor sales decreased to $3.7 million in the fourth quarter of 2009, just about flat with $3.8 million in sales in the third quarter of 2009, but significantly down from $7.1 million in the fourth quarter of 2008.

Our compressor sales margins continue to be strong, and are running 26% this year to date, as opposed to 29% last year.

The compressor sales backlog at our fabricating facility in Tulsa at the end of the fourth quarter of 2009 was approximately $200,000.

This indicates that fab revenues are essentially real-time with a zero forward visibility.

The very difficult part of managing this business is balancing minimal backlogs against the future potential, and in the interim handling the associated costs.

What happens is that at low activity levels, fixed costs cannot be fully absorbed into the available equipment throughput, and unabsorbed costs will be charged to the income statement.

That is where we are now and we are taking additional cost cutting measures, while trying to weigh the cost savings against the need to be ready to handle further work.

To further complicate the picture, there are a couple of large multi-unit jobs that we have bid on and are finalists for.

There is no guarantee of an award, but the customer's decisions have been delayed beyond their originally anticipated schedule and we have to try to predict the unknown, as far as timing and amount of work this might represent for NGS.

If original schedules had been adhered to, we would have had a smooth fab schedule.

But delays are what has caused us to carry more costs than we anticipated, hence the balancing act.

As I have said forever, this is not a quarter to quarter type business, because it is too hard to gear up and down on a short notice.

We may have to run this business at zero margin or a minimal loss until we see what develops, although we won't do that for long.

This is going to be one of those decisions whereby in a quarter or two I am going to be either Superman or Lois Lane.

You are going to love me or not, but it is the best decision for the business.

From a compressor rental standpoint, rental revenues for the full year 2009 were 5% higher than 2008.

And we increased gross margins from 62% to 63% in the same periods.

We are justifiably proud of both those marks.

As 2009 progressed, rental revenue pressures continued and revenues fell from $12.3 million in the fourth quarter of 2008, to $9.5 million in the fourth quarter of 2009, with quarterly rental margins decreasing from 63% to 59% respectively.

Sequentially, rental revenues fell $1.3 million to $9.5 million.

The rental fleet had essentially no growth this quarter as we added four new compressors.

Our 2009 capital expenditures were $8.9 million, and the fleet now totals 1,776 compressors.

We had an average rental fleet utilization rate of 66% in the fourth quarter.

Our utilization has held in the 65% to 66% range for four months now including February.

That is the longest period we have had of relatively steady utilization over the past year.

And we are watching it closely to see if this may signal some sort of bottom.

It is too hard to say whether that is the case, but I will say that February was the first month that we have set more units than we got back in over a year, certainly positive signs that we are being very, very cautious about it.

This also explains some of the margin pressure we had in the fourth quarter of 2009 when we experienced a 59% margin.

Some of it was winter weather, and although we have that every year, this year we had winter everywhere from Michigan to Farmington to the Barnett Shale.

It is good for business but it takes more manpower and money in times like that to keep equipment running.

Additionally, with the added equipment we have going out, there are make-ready expenses to get the units ready to be installed.

We do not capitalize any of those as others do, so it goes to our real expense column and affects gross margins.

This is not unusual when coming out of a low level of activity.

Gearing back up causes expenses to increase with the revenue to follow.

In a growing business like 2008 we didn't have this.

First, there isn't the amount of idle equipment to bring back up, and second, constantly growing revenues will cover those expenses.

If we are seeing some recovery we will see some of these expenses continue and then trail off during any ramp up.

On our balance sheet liquidity continues to be very strong, and our capital structure bulletproof.

Our total short-term and long-term debt was $13.7 million as of December 31, 2009, including $7 million drawn on our $40 million line of credit.

And cash in the bank was $23 million, a $5.3 million increase this quarter.

In January 2010 we'd paid down $6.5 million on that $7 million line of credit, which leaves us with approximately $7.25 million of total debt, or a total debt to cap ratio of roughly 5%.

Our cash flow from operations was $7.8 million this quarter, and $32.2 million for 2009, with an operating cash flow to revenue ratio of 47.5%.

We are essentially converting each dollar of revenue into $0.50 of cash.

Our current ratio is 3.8 to 1.

This continues to be a very difficult time in our industry.

Pricing remains pressured by those competitors with too much idle equipment, and apparent need for cash.

And utilization has declined because our customers' needs for compression equipment have dramatically lessened.

On my last call I moved back the point at which we thought a recovery in our business might begin to materialize.

I said that Q1 will be rough, but that Q3 and Q4 should show some signs of firming.

I am not necessarily saying it will be a vigorous recovery, but I am hoping it will be good enough for us to say whether it has staying power.

If it has some real legs to it.

As far as Q2, I didn't say much about it, except that it will be a transition period, which being the spring shelter season it always is.

The issue of spring is of course gas pricing.

And with some softness now it is too hard to say what might happen.

In any event we are presently seeing some positive signs.

As is always the case, any prognostication I make is dependent on some recovery in the macro economy.

Our inquiry levels are running at a much higher rate than this time than last year.

And as I have already mentioned, February turned out to be a good rental month for us.

We continue to have an excellent reputation in the field, and that is demonstrated through some of the jobs we are winning at higher prices than the competition.

In spite of the situation at hand, I think our results show the strength of our business.

Rental revenues have increased year-over-year, margins have held up, costs have been cut, and significant levels of cash are being generated.

We are not out of the woods by any means and there is certainly weakness in our sales business.

But NGS is operated and positioned to sell to be a premiere provider of gas compression equipment, and I think the results prove it.

Beyond this, I wanted to comment on the phenomenon of the recent gubernatorial election in Virginia.

Not on the election itself, although I was personally encouraged by it, but on the industry skirmish going on between the Commonwealth of Virginia and the Federal Government, embodied by Ken Salazar, an unelected Head of the Department of Interior, and self-anointed keeper of all land, air, and water regions.

Governor Bob McDonald ran with part of his platform being the opening of regions offshore of Virginia for drilling.

He campaigned on it and didn't hide it, so when he was elected, one could assume that the citizens of Virginia agree with the Governor.

In fact, Virginia's two senators, both Democrats, support the Republican Governor on this.

Well, apparently having the Governor, Virginia residents, and both Senators for offshore drilling is no match when you have Ken Salazar watching out for you.

Mr.

Salazar now says he wants to move the previously scheduled lease sale back from 2011 to 2012, so that he can consider whether the Bush administration acted properly.

So, by fiat, Mr.

Salazar is again exercising his and the Administration's personal preferences, for what a state and its people should be allowed to do.

Never mind the election, Washington, DC of course knows better than you, how you should live and apparently vote.

Thank goodness we have people looking out for us before we make decisions that might lead to greater energy independence, and by the way, well paying jobs.

That is the end of my prepared comments.

As always I want to commend the employees of NGS for their efforts, loyalty, and dedication during these hard times.

It has not been easy, but they constantly rise to the occasion.

As is typically the case, they do the work that I get to brag about.

Thanks for your time and I'll now turn it back over to Nathan to open the lines for any questions.

Thank you.

(Operator Instructions).

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

Please state your question.

Good morning, Steve.

You did mention inquiry rates starting to pick up.

We saw that there was certainly a significant rebound in drilling activity in the Barnett in December.

Typically at a drilling inflection point, what is the lag to your business?

Well, I hate to even say anything typical anymore with this kind of market.

But you would think there would be a quarter or two delay.

If you want to say typically as being historically, you would think maybe a quarter as to why we were seeing probably in the 2005/2006/2007 time period, because people were really trying to get things on line.

I think with the apprehension that is still in the market as far as what gas prices are going do and things like that, you may not have near the urgency to do some things, and it may take another quarter to instead of one, maybe going to two quarters to where people get things fully hooked up.

Okay.

The Marcellus, you adding any more compression up there?

How is that market developing at this point?

Yes.

We are moving a little more in there, a little at a time.

It is not a big rush anywhere, actually we are probably seeing more activity in the Barnett and in the Rockies.

But it is just slow and steady.

So, it's -- but it's not -- it is really not one of our busier areas right now.

There is more going in, but it is not as busy as some of the others.

I haven't heard you mention the Eagle Ford before, do you see -- I mean, that is a little bit closer to home.

Do you see that developing in a couple of years?

Yes.

We are getting a lot of interest in that, and in our talking to customers and bidding stuff on that.

So, it looks like it is going to be a fairly decent play.

And of course the thing we liked about it versus the -- say the Haynesville and some of the Marcellus', that stuff is not coming in at these higher pressures like some of those other plays are.

So, compression seems to be needed a little quicker in the development at those fields than some of these other plays.

Okay.

Last question from me was just on, I am sure you are setting out your annual budget.

Do you have an expectation for where the rental fleet will be at the end of this year?

And I know you can change that many times, but what is your take right now?

Yes, we -- I think 2010 is going to be kind of a mirror image of 2009, from the point of 2009 started out high, it went down low, or maybe it's at the low point now, maybe it will start ramping up over time.

I am going to say from a capital expense standpoint, we didn't -- I don't think we added 40 compressors to the fleet this year, and spent about $9 million.

I really don't anticipate a whole heck of a lot more than that unless we do see some, a little more ramp up in some of that.

Now we are, like I mentioned, February was a decent month.

And I don't -- I want to be very cautious about, I am not saying that is the beginning of a resurgence.

Because again, one point does not a trend make.

It is encouraging but we certainly need to get a little more, a few more months under our belt before we can say something.

But unless we see something come quicker than we are anticipating, I would think the compressor add and the CapEx would be about the same as 2009.

Thanks a lot, Steve.

Okay.

Thanks, Steve.

Our next question comes from Joe Gibney from Capital One.

Please state your question.

Thanks.

Good morning, Steve.

Hey, Joe.

Just want to talk a little bit on the sales side of this balancing act as you try to be Superman or Lois Lane.

As you rationalize what you are going to do from cost cutting, you have held the line pretty nicely on compressor sales gross margins the last couple of quarters, around 26%.

I know you are combating fixed cost absorption issues in the first quarter.

But do you think we can hold above 20% margins?

Just trying to understand direction what we're talking about from a trough standpoint, and how you try to balance that cost cutting you need to do, with -- you are talking about large multi-unit jobs that are out there, always subsequent to the vagaries of timing of course, just curious if you can give a little color for maybe expectation from a margin standpoint in the first quarter trough?

Well, you summarized it very well.

With essentially it being a real-time sort of thing, for example, yesterday we heard, well, there may be some other work coming on in this project and that project, and things like that.

So, just about every day or if not every other day we are looking at the production schedule trying to balance not only units and work, but people and who we need where.

The plants are running undercapacity from a square footage standpoint.

That has been the case about all year.

Really what we are trying to balance is the work coming in with the people there, and what we need to do not just now, but based on what we think may be coming.

And that is the dilemma.

As I had mentioned if we had had some of these jobs awarded based on the original schedule we would either know to do A or Z.

Now we are kind of somewhere in L, M, N area of the alphabet, we are kind of in the vast unknown middle.

So, that is really the problem we are having right now, trying to figure out and anticipate when these awards may come, what we may or may not get and things like that.

From a margin standpoint in Q1 maybe in Q2, it's --- boy, it is a real toss-up as to what those might run, Joe.

As I mentioned, I mean, we could be into, if we don't keep the plants fully loaded through a quarter and absorb all of those costs, yes, you could have a -- essentially a negative margin on some stuff.

Because that stuff essentially has to be charged to the income statement.

So, we would be having more costs than we would have revenue to cover that stuff and absorb it.

So, that is the problem right now -- it's -- we are in March, some of this sub work is coming up.

We have had some awards, there is just not enough going forward and we are trying to limp along until these bigger ones come, until decisions will be made on those.

So, shoot, it could be zero to 20.

And I hate to even say that because that doesn't tell you much, and it may not be that bad.

But it's -- that is a real dilemma.

It is a month-to-month sort of thing.

Okay.

I understand, it is a moving target.

And just a little bit further on sales pricing I guess a little color there.

I know this is more pf a situation of just lack of volume and lack of order flow translating into utilization.

Can you comment a little about the pricing environment at least from the fabrication side?

Is it still pretty tough out there with a lot of hungry fab yards out there bidding really low for work, or is that too stabilizing some of what you are seeing on the rental side?

Well, there is still a lot of that -- I don't think it's too much different than the rental side.

You get some players that are just cutting the heck out of stuff, for whatever reasons they need to.

Either they have got, from a rental standpoint, too much equipment idle, from a cash standpoint, have just got to generate cash no matter what the margins are, and things like that.

You know, from a -- as seen in our sales margins, we are still holding up fairly well in that.

And it is not from the point of driving away business.

We are just -- as we head down the path we can bid competitively on price, but with our cost structure and how we run equipment through that shop, and the stuff we bid on, we are able to keep our costs very well in-line and get those margins.

So, I don't -- if I had to hazard a guess I would say we are probably at the bottom of pricing overall.

But again with Q2 being somewhat of a transition quarter we are going to have to see what happens in the industry, to see if it does start to firm from here, or stays pretty soft.

Okay.

And then just one last one for me, just curious on the geographic utilization within your existing feed, I understand Marcellus and Haynesville commentary, but just curious now as you bottoming out here mid-60% on the rental side, is there any particular region that has seen a little more bleed off than others whether it be Barnett or San Juan or Arkoma, just curious if you could comment on that?

Yes, Barnett has always --- you know, for the year has been the one that has taken the biggest hit, and not unusual.

That is our biggest area so you are going to have -- probably have the most effect there.

But it has also come back quickest.

There's a lot of shut-in wells out there, so those are getting turned back on.

Not all of them but some of the stronger ones where the operators can make money.

So, the Barnett has been the one that has hurt the most, and it has been the one that is kind of leading the most, too.

But surprisingly to me we are seeing a decent amount of activity in the Rockies, which is normally the first to go and the last to come.

Okay.

That is helpful.

I appreciate it and I share your frustrations as a native Virginian on the offshore policies.

Interesting ongoing debate.

Appreciate it, Steve.

I will turn it back.

Thanks, Joe.

Our next question comes from Matt Beeby from Morgan Keegan.

Please state your question.

Thank you.

Good morning, Steve.

Hey, Matt.

Steve, you'd mentioned the adjustment fourth quarter for -- on the tax line.

Could you clarify that a little bit for me?

And do you have guidance for 2010?

Well, there is production tax credits which we are eligible for, based on really fabricated equipment.

And they give you tax credits based on equipment that is fabricated and sold.

And you have to make those estimates at the beginning of the year and going forward.

And of course as the business fell off, those estimates became more and more, the variance in the estimates became bigger as the year went on.

So, in fourth quarter we had to revise those estimates and change that.

And that is when we had to make those production tax credit was going to be a lesser amount than what we originally anticipated so that is what drove the tax rate up.

For 2010, hopefully we don't get that, but it seems like every year when you get to fourth quarter there's -- it's awful hardest especially in a market like this to get those tax rates exactly right sometimes.

And again as I mentioned, the tax rate for the year went up only 1% but when you have to take it all in the fourth quarter, it has a bigger effect there.

So, I would hazard a guess that we will be at 35% or 36% for the year.

But again, if we miss some of the estimates going forward and the business changes either up or down, you have to make an adjustment in the last part of the year.

There could be some changes there.

You also mentioned that utilization now kind of 65% to 66%.

And is there a -- kind of a magic number where you might see some pricing power once you get to a certain level of utilization, and about how long after you see utilization do you see a pickup in pricing?

Well, you know, a lot of that's -- there's two things we're going to have to look at, number one, our utilization, number two, what the competition's utilization is, too.

You know, we -- all through this downturn we have run at higher utilization rates than most of the industry, probably anywhere from 5 to 10 points.

So, although we feel like we ought to be charging more, the competition apparently doesn't have the same opinion.

And they tend to keep their prices down.

So, I think we are going to have to get, it wouldn't just be our utilization getting up to some point.

It is still going to be what the market out there is doing, and what the competition is doing.

Now as I mentioned, we still tend to be a premium price provider even in this market.

Now certainly the price points have reset down.

But we continue to get jobs that are priced higher than some of the lower-priced competition.

So, we are getting a good price in the market.

Certainly we are delivering excellent service for that price.

Yes, I just don't --- I don't anticipate much if any pricing leverage in 2010 other than what we are doing just being a little, getting a little pricing -- better pricing in the industry.

Okay.

Last one, use of cash.

You talked about the balance sheet.

Any commentary there on plans for maybe geographic expansion, or potential acquisitions elsewhere in the natural gas supply chain?

Well, we did take $6.5 million of that cash and paid off essentially --- well, all but $500,000 of the line of credit.

That is going to help our earnings just a little bit, and we are still generating that cash certainly.

From the point of geographic expansion, we don't have to use that cash too much.

We can typically absorb it just in ongoing operations through the rental side.

And, in fact, we are doing that.

We have expanded a little in a couple areas from a point of setting up a couple new shops, but as far as acquisitions it is the same story, I think we have always had all along.

We continue to talk to people and look at things.

But we either continue to run into, of equal importance valuation issues or fleet quality.

And as you know we are very particular on the type of fleet we run and buy.

And so those things still tend to be caught up in some of the issues when we look at these deals, so we are always looking.

If a good one comes along that we can make a deal on, or certainly no issue.

But you always have to play it as it happens.

All right.

Thanks, Steve.

Okay.

Thanks, Matt.

(Operator Instructions).

Our next question comes from Gary Farber from CL King, please state your question.

Sure.

Good morning.

It sounds like for a couple of quarters some of your competitors have sort of been limping along and cutting price, and things like that.

I am just wondering how much longer can that go on?

And is there a point at which some of these companies go away?

Or what does the competitive landscape look like when you look two, three quarters, or a year out?

Does it look much different?

Well, I gave up years ago on anybody going out of business.

I think that just distracts you from what you really ought to be paying attention to.

And plus, with -- the good thing about compression equipment is it lasts 15 or 20 years.

The bad thing about compression equipment it lasts 15 or 20 years.

So, if -- I prefer to have weak competition hanging in trying to make it, than them going out and somebody stronger coming in and buying that equipment.

So, I don't think we will see anybody probably necessarily move out or in.

Over the next year from a -- are you talking about next year from a competitive standpoint?

Yes.

It just sound like some of these guys have been limping along.

And I am just sort of wondering, maybe like you are saying they just stay in there.

Or does the industry change, or it sort of maintains its structure, and just continues on for the foreseeable future the way it is?

I am going to say it is probably just going to continue on.

Because if we -- I am thinking that 2009 was the worst year.

And I am not saying 2010 is going to be a great one.

But there may be --- I mean, it feels like we are getting just a little better environment going.

And again, I don't want any of you guys to go out and say anything like, man, Steve says that the depression is over.

That is not what I am saying.

But I think there is still going to be some competitive pricing out there.

Some people have -- some fleets have more idle equipment that --- and they look at it from the point of incremental cash.

They just say, heck, put this stuff out at -- I don't want to lose any cash, but I don't care what it does net income, or anything else.

And we tend to still look at surprise, surprise, net income.

And so we want to try to maintain some things like that.

But some people are pricing on an incremental cash flow basis.

And that is where you get the real low pricing that is difficult to fight.

Now hopefully everybody is paying attention in the market, and hopefully seeing some resurgence in their own businesses, and we can get away from some of that.

But that is up to them, not me.

And just lastly, the cash conversion rate you highlighted, that continues into fiscal 2010, you think, at such a high rate?

Well, I don't know if it will stay that high.

I think if we have some improving quarters it should, it could still, it is a pretty good rate, so even a little off of that is still going to be pretty decent.

But we have been able to generate cash -- what since Q2 of 2009 when we really started -- went cash positive pretty quick when we stopped building.

And we've always said that would happen once we stopped building.

Now we didn't think it would be from a downturn this severe.

But we always say once we stop building we will start generating a bunch of cash, which we have done.

So, I think our cash generation capability and capacity continues unabated.

The level and amount will be fully dependent on our net income.

Right.

Okay.

Thanks.

Thanks, Gary.

Our next comes from Dick Kindig with Keeley Asset Management.

Please state your question.

Hi, Dick.

I had a little interruption here when you were talking about the Clark Kent/Lois Lane analogy.

What were you talking about there?

Oh.

That's -- the balancing act we are trying to do with our fabrication facility, as far as building and selling equipment, where with a lowly level of activity, what we have got to balance is the cost structure in that facility versus the level of activity now, versus what we think the future levels of activity may be.

So, it is a balancing act.

And the comment I made was that if we make the right decisions, a couple of quarters from now you all will think I am a great guy.

If not, a couple of quarters from now you will be throwing rocks at me.

I'm not a native of Virginia but I share your frustration with this Administration.

Let's hope it's won and done.

Thanks, Dick.

Our next question comes from Bruce Baughman from Franklin.

Please state your question.

Good morning.

Can you remind us what the debt covenants are, and whether you expect to bump up against any in the next couple of quarters?

Well, I mean there is some cash flow, net income, EBITDA covenants in there.

No, we are way far away from bumping up against any covenant.

We don't have any issues whatsoever in that respect.

And then also, I am assuming that the biggest generator of deferred tax liabilities is accelerated depreciation on the equipment.

Is that correct?

Yes.

If the CapEx continues at recent levels, is there a point in which that phenomenon begins to turn around, and cash tax payments begin to ramp up?

Yes, no you are right.

And that is a potential in 2010.

And again that is from a cash tax standpoint versus the book tax discussion we'd had --- had earlier.

But yes that is something we have got to look at and you are going to have to -- there is always a day of reckoning on deferred taxes, as you know.

Can you give us some idea in terms of the life, typical life span or taxable life span of the equipment and -- or depreciation life?

And at what point, if the --- if purchases and dispositions are about equal at what point the equipment gets into the state where it begins to -- where the deferred taxes begin to come down?

Well, the depreciable life for book purposes we use on compression is 15 years.

And then for tax purposes it is seven years.

That has always been the case we have used on that.

And I think that is pretty typical.

We will start seeing probably some of that start to come due in 2010.

And again, kind of in-line with the previous question on what our capital expenditures are going to be for the year, going to be fully dependent on what we do or don't spend, from the point of building fleet equipment and additional depreciation we can take on to keep deferring some of that stuff.

So, it is a pretty hard target to look at.

And/or if there is some other -- if an acquisition comes along that changes the whole deal, and things like that.

So, if everything just stayed the same, yes, we will start seeing some of those taxes come due from a cash standpoint.

But again, if we are in the bottoming phase of this thing, it may not be near the impact in 2010 as what it would have been just from a static perspective.

Okay.

But if we are in a bottoming phase but we don't get a lift off, say a year from now we are having a conversation where the outlook is about the same as it is today, what will that imply for cash, for taxes say as a use of cash?

Yes, I don't -- we have run those numbers on different scenarios, and we probably looked at two or three different cases on that.

And I don't have those right at the top of my head right now.

If you wanted to give me a shout later on, I can see what those looked like.

It is nothing that we are thinking is going to be an appreciable amount going forward.

It is certainly going to be more than what it was in 2009, 2008 and 2007, when we had a lot of depreciation going on.

We don't think it is going to be a -- certainly an unmanageable amount in 2010.

But I can't remember the exact -- but with all of the scenarios we run all the time on these things, they tend to get muddled and you have quite a wide range.

So, I don't have that number right with me right now.

Okay.

Thank you, Steve.

Our next question comes from [Bob Johnson] from [Johnson Investments].

Please state your question.

As you know, many economists think that the US might possibly be in for a sustained multi-year period of economic stagnation, similar to Japan.

Assuming that there is no extreme positive developments such as the Administration coming up with some big proposal to fund natural gas as a fuel for automobiles, assuming there is no unforeseen positive development, looking ahead say five years, can you envision the Company ever having a rental fleet of 400 or 500, or 1,000 units out there?

Or might the rental fleet basically peak, and remain no higher than 1,700 or 1,800?

Again, looking five years out.

Well, yes -- we certainly think it will be bigger five years out.

But you are right.

It depends on what the markets can do and things like that.

I mean, I am pretty optimistic about it from the point that certainly everything is moving, I mean, the world is moving to a less carbon-based environment.

Now I don't think it is going to be filled with windmills and solar panels in the next five years.

I think that is a 20 to 30-year sort of thing.

And even then it is not going to be a big piece.

And I think the natural -- natural to me, not the --- and I think it would be on the East Coast substitute, for the high carbon-containing fuels, like coal and oil is natural gas.

So, I think even without a huge government stimulus, which apparently they are not interested in doing, anyway, I think naturally natural gas is going to become a bigger and bigger piece of the fuel pie, just because it is a lower carbon-based fuel.

So, with that, I think that is a positive indicator.

The shales that everybody has found and certainly has increased our reserves tremendously over the past few years going forward.

I think that in the short-term that is a difficult thing because it has led to an oversupply situation, of course underdemand has helped that from the macro side, but the service supply situation is because the operators have been so successful in finding that gas.

But what it also does longer term is give this country, whether it is from a transportation standpoint, or a power generation standpoint, or whatever, the confidence that, well, number one, we do have a lot of supply of gas here.

We are not going to build up a bunch of infrastructure, and then not have the gas to fuel it.

And then that large amount of gas gives you some price stability and less volatility in this.

So, that is a good thing.

Once we get past this downturn we are in now.

So, I think if you start looking at that, then from our standpoint from a -- I think those things will grow the fleet.

We have also concentrated on the fastest-growing piece of the business, which is this well head piece concentrating on shales.

That is the gas supply going forward.

So, even -- this country is always going to need natural gas.

And as these conventional plays start to decline and really become something of the past, they are going to be replaced by these shale plays, which relatively need more compression than the older plays.

So, we are going to get some uplift from that.

And we have had a very good ability to get share.

We are not in all the markets we want to be in yet.

So, we have got the chance to grow into new markets and take share in our markets.

And now one of the things I think that is going to be exciting in probably the three to five-year range is how all of these overseas companies are coming in here, and getting into these shale plays.

Number one, for the returns, they may profess otherwise, but they tend to be just as capitalistic as we are.

They want to make a return.

But they also want to learn how to produce, drill and produce and complete shales, because there is a lot of international shale.

And in the past international is always seen as a market for big horsepower providers, big equipment, things like this.

I think that may be changing over time.

We will see.

It is way too early to say.

But you have got Total coming in, Statoil, you have Exxon now buying XTO to get into learning about those shales, because they have got a lot of shales overseas they want to start to develop.

So, if that in fact develops into a market that is just as good for small horsepower as large horsepower, those are bigger markets than in the US.

So, I think there are a lot of factors going forward, irrespective of what happens from the economic standpoint.

Now, if -- certainly things always get better in a vibrant economy.

And we look at that as even higher growth model.

But I think from our perspective we have got the ability to weather the storms, and grow in a lot of different ways.

And my concern, of course, just to finish up, is that shales are so productive that we may have a glut for a multi-year period.

Well, and there has been talk about that.

There are perspectives both ways on that.

And if that is the case, your business changes a little from the point of you may be a little slower growth.

Certainly your costs become a big driver in things.

But again, we have proven even in a downturn as bad as 2009 was, and I have done this for longer than I want to tell you guys.

This is the worst one as far as how fast it went, and how far down it went.

But we have generated cash.

We have gotten better margins.

We have really gotten through this in pretty good shape.

It certainly wasn't anything I would have picked to do.

But I think as I mentioned I think our model is right.

We are in the right markets.

We are concentrating on the right things.

And we are very conservative with shareholders cash and shareholders investments.

So, if there is a long-term moderating in the markets, we will be one of the survivors through that.

And what that looks like from a gross standpoint is anybody's guess, but I think overall long-term I don't think, and long term saying three to five-years, I don't think it is going to be a bad market from that perspective.

The country is still growing with the need of gas.

I think there is going to be more, well, there are in fact more natural gas fired plants being built than coal plants.

In fact, coal plants are being canceled all the time.

So, even just from a present need for gas, I think there is going to be more and more gas in the mix.

Thank you very much.

Okay.

Thanks.

At this time there are no further questions.

I will now turn the call over to Mr.

Taylor for closing remarks.

Okay.

Thanks, Nathan.

Well, that is the call.

We look forward to visiting with you all in about three months on how Q1 went.

So, thanks a lot.

This concludes today's conference call.

Thank you for attending.