Natural Gas Services Group Inc (NGS) 2010 Q2 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; Steve Taylor, Chairman, President and CEO.

I will now turn the call over to Ms.

Kimberly Huckaba.

Ms.

Huckaba, you may begin.

Thank you, Erica, and good morning again, 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 considered 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 the forecasted results.

Those risks include, among other things, the loss of marketshare 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 any subsequent events or circumstances.

The important factors that could cause actual results to differ materially from the expectations reflected in these 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 as filed with the Securities and Exchange Commission.

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

Steve?

Okay, thanks, Kim and thanks, Erica.

Good morning and welcome to Natural Gas Services Group's second-quarter 2010 earnings review.

2010 continues to be a transition year and we are generally satisfied with this quarter's results due to our progress on all financial measures.

We are seeing increased activity, but pricing continues to be low and as I have mentioned before, it will be into 2011 before I think we will see steady signs of recovery.

As I review the numbers with you, the year-over-year comparisons are going to be less representative of what our business and the industry is currently experiencing than the sequential quarterly comps, which more so reflect today's market conditions.

The world has changed over the past year, evidenced by the fact that our peak revenues were in the first quarter of 2009 and the trough to this point is the first quarter of 2010, a dramatic change in a short amount of time.

And the annual comparisons become less meaningful in all but a historical perspective.

Total revenues in the second quarter of this year declined to $11.9 million from $16.8 million in the second quarter of 2009 with sales and rentals contributing roughly 60% and 40% of the decline, respectively.

Sequentially, total revenues rose 3%, primarily due to increased growth in flare and parts sales, aided by a small lift from compression rentals.

Looking at total gross margin and comparing the second quarter this year to the second quarter of last year, total gross margin fell to $6.8 million from $9.2 million, but rose from 55% of revenues to 57%.

This improvement in gross margin is primarily due to our ability to maintain high rental margins and a shift towards rentals that took advantage of that mix.

Sequentially, gross margin was up 3% from $6.6 million to $6.8 million with overall margins holding level at 57% of revenue.

SG&A expense was down 8% year-over-year to $1.5 million in the second quarter of this year and moved up 2% in this year's consecutive quarters.

Comparing the year-over-year quarters, net income declined from $2.9 million in the second quarter of last year to $1.5 million in the second quarter this year, but climbed 13% sequentially from $2.1 million to $2.4 million.

As a percent of revenue, sequential quarters grew the net income margin from 18% to 20%.

EBITDA declined from $7.5 million in the second quarter of last year to $5.4 million in the current quarter, but held steady at a 45% margin.

Sequentially, EBITDA went from $5 million in the first quarter of this year to $5.4 million in the second quarter, a 6% increase and moved up from 44% to a 45% margin.

Fully diluted earnings per share for the second quarter this year was $0.13 per common share.

Total sales revenues declined to $3.2 million in the second quarter of this year as compared to revenues of $11.5 million in the year-ago quarter.

Sequential quarterly total sales revenues improved from $1.5 million to $1.8 million and margins moved up from 32% to 36%.

Compressor sales continued to be very anemic with sequential quarters having revenues less than $400,000 per quarter at breakeven margins.

However, we have added to the backlog that we started to build last quarter.

At the end of last quarter and the first quarter of 2010, the backlog was $4 million and we have more than doubled it to a $9 million total backlog at the end of the second quarter.

Compressor rental revenue had a year-over-year decline from $12 million in the second quarter of '09 to $9.9 million for this current quarter with gross margins of 65% and 62% respectively.

Sequentially, rental revenues were essentially flat at $9.9 million for both quarters.

The gross margin improved from 61% to 62% of revenue.

Average rental price in (inaudible) units in the second quarter of '09 was at a historical high and we were down 9% when compared to the current quarter, but the average rose 3% in the recent sequential quarters.

We ended the second quarter with a rental fleet utilization rate of 68%, a slight increase of 100 basis points from last quarter and that was on top of a 1% growth in fleet units.

The rental fleet size stands at 1806 compressors at the end of the second quarter, up 18 from last quarter and up 30 for the year.

We have been fortunate enough to land a couple of good multiunit rental deals from large operators and we anticipate adding a total of up to 100 units to the fleet this year to supply them.

That would be a doubling of our first-quarter fabrication output during the second half of the year.

And the attractive part of this is that these units are committed as they are built, so we are not building on speculation.

Rental CapEx year to date through June 2010 has been $5.8 million, but we project CapEx this year in accordance with what I just mentioned about the second-half fabrication output could be in the $16 million to $18 million range.

This compares to 2009 when we added 46 units with a CapEx spend of $9 million.

Looking at our balance sheet, our total short-term and long-term debt was $5 million as of June 30, 2010 and cash in the bank was $23.8 million.

Subsequent to this date, we paid off the remaining $500,000 on our line of credit and terminated that facility.

We are presently in final negotiations with another lender for a new revolving credit facility.

Our cash flow from operations the first half of this year was $15 million compared to $16.9 million for the same six months in 2009.

In spite of the severe downturn, this is only an 11% decline in operational cash generation.

Now when the decline from a downturn decelerates or stops, there is always a bottoming process, the [parity] of the cycle and that may be where we are.

And although we are generally satisfied with our results, we continue to operate in a challenging market with little clear indication of future activities.

The natural gas commodity price seems to have settled, but at a low level.

Storage levels have been helped by a warm summer and while not getting any worse, it is not showing any real positive movement.

We likely have another quarter or two of middling prices until fall and winter arrive and take hold.

And we continue to wait for the long-promised recovery in the economy.

There are competitors with yards full of equipment and undisciplined pricing seems to have returned after a brief respite.

And I imagine this will continue until there are definable market signs of relief.

There are however positive signs.

Our rental revenues have steadied as had utilization and we have seen an increase in our sales backlog.

Margins are holding and we continue to generate exceptional amounts of cash.

Any advancement we are seeing is encouraging, but it is not broad-based and forward progress will be hard-fought.

Over the past few weeks, we have seen all sorts of maneuvering, primarily political, by the current administration abetted by Congress on topics from deep water drilling to cap and trade to fracturing legislation.

Some initiatives would actually be acceptable if grounded with honest intent instead of the punitive slant.

It seems like all proposals have onerous second and third order effects.

I am the first to agree that the Macondo blowout was a tragedy and happy that it finally seems to be under control.

And I'm reluctant to use it in the context of any of my remarks.

The actions of our government and this whole affair has been a case study of incompetence.

I couldn't even make some of this stuff up.

I will not get into the details or blame for the cause or fault of the accident because my comments don't relate to that; they relate to the response of our government, whose initial reaction was to stop everything and place a moratorium on deep water drilling.

While this certainly prevents any accidents, it also throws hundreds or thousands of people out of work and does nothing to solve the problem.

We saw other crisis management actions take hold like threats from the Interior Secretary about a boot to the neck and from the President about his need to kick some ass.

Pure political theater and nothing of a problem-solving nature in any of it.

The preventive action I enjoyed most was to rename the Minerals Management Service.

Huh?

That certainly reassured us that everything was under control.

I don't know if any of you watched the initial congressional hearings on the accident, but one of the solutions proposed by Congressmen to prevent another accident like this was to simultaneously drill relief wells, two, not one, every time a deep water well was drilled.

I was more than a little disturbed by his comments, not primarily because of the obvious economic impossibility of the proposal, but because he absolutely did not have a clue as to what he was talking about.

I am not making any judgment about Tony Hayward, but another congressman took him to task for not personally approving the drilling plan and casing design.

Again, the comments showed that this representative did not even understand the basics of how any business works -- the delegation and allocation of responsibility and accountability, the age-old division of labor.

I presume he thinks a proper risk mitigation practice would be to have the CEO pilot a skimmer himself.

These guys are making the rules?

I often wonder why Congress hasn't enacted a natural gas act to kickstart the substitution of natural gas for dirtier fuels.

Oh wait, I just answered my own question.

That is the end of my prepared remarks and I will turn the call back to Erica for questions anyone might have.

(Operator Instructions).

Steve Ferazani, Sidoti & Co.

Morning, Steve.

I mean you sounded pretty unhappy reading through the numbers, but it sounded to me like backlog more than doubled, utilization was up, your fleet size went up.

All the numbers you ran through sequentially were significantly better.

No, I am not unhappy.

Like I say, we are generally pleased with the results.

It is just kind of -- it is this whole action of the bottoming process here where a lot of effort goes into make just incremental changes.

We do think, and again you know our reluctance to call a bottom and we will call it later on after we see it looking back, but no, we are generally -- we are happy with the backlog building.

We are seeing -- the pricing seems to be up just a little.

My concern is we are still in the midst of this bottoming process and I think there is - we have seen a resurgence in some pretty, what we think is silly pricing in some of it.

So we are making progress, but it is still a pretty tough fight.

When will we see that backlog turn into revenue on the sales side?

Typically how much will that lag the bottom on the rental side?

Well, it is a three to six-month lag typically.

That $9 million really should be -- the majority of it should be -- I would say 80% of it at least would be in this year.

Then can we just touch on a little bit of the new shale development?

Obviously there has been a lot of talk out of the Haynesville about choking back production, which could push back the timing of compression needs.

Can you sort of run through what you are seeing in say the Marcellus, Haynesville and Eagle Ford for demand and when you think that sort of picks up?

Well, I think we are still in the same mode as far as timing.

I have heard of the choking back for a few months and things like that.

And I don't think that really affects the timing too much for us.

I think that's probably more of an effect on any current activity going on out there again.

We will be a little behind the initial curve in those plays because we have still got to wait for those wells to decline down a bit.

Choking back is a well-accepted reservoir management practice, but I don't think that is going to stretch out the timeline too much for us.

Instead of a two-year lag, maybe get a 2.5 year lag or something.

But still you have got, in the Haynesville, the decline rates of 75%, 80% plus and things like that.

Choking them back isn't going to hold, isn't going to drop that too much off of what it is and really I don't think stretches out the timeline significantly for when we would start planning in those areas.

I know this is probably not a question you want to be wildly guessing at, but when do you think any of those plays become material for you?

Well, I think -- actually we have heard in the Marcellus about wells coming off maybe a little quicker than what people were anticipating, certainly faster than what we thought.

Again, it is just antidotal and it is not anything broad across that area I don't think.

Again, I think we are still into the 18, 24-month period.

And if it is like the other place, we will start seeing a little go in and then it will start accelerating.

But I think the Marcellus is still going to be a good area, certainly the Haynesville and all these others, the Eagle Ford.

My feeling is the Eagle Ford may actually jump in front of the Marcellus as far as activity for us specifically just because of the liquids content in that play has grabbed a lot of people's attention.

And then you get the typical delay we are seeing in new areas like especially the Northeast, which is not oilfield country and a lot of the -- just the general cycle getting comfortable with the oil and gas positions up there from the regulators and the rules and things like that.

So I think you're going to have a little more slowing in the Marcellus just from a regulatory standpoint and the Eagle Ford being south Texas where oil and gas is coexisting with everything, you may actually have the Eagle Ford jump in front of the Marcellus a bit.

Thanks a lot, Steve.

Bo McKenzie, Global Hunter.

Hey, Steve.

I get what you said about the 100 compressors, what would you kind of estimate the average fleet would be in Q3 and Q4?

The fleet count?

Yes.

We are a little over 1800 now, so another 100 and we were at about 30, so another -- so again, just roughly add say another 35 to 40 each quarter.

That is the ending count on those quarters or the average counts for those quarters?

Right, right.

That would be the ending number.

You said that pricing is still tough, but if I look at the margins, I assume you guys aren't really seeing prices deteriorating any further.

It looks like things are holding their own, aren't they?

Our average rental pricing came up quarter to quarter, down year-over-year, but that is not a surprise, but up quarter to quarter.

So that looks good, but again, we are starting to get some feelers just from some things we see that there is some others out there that obviously aren't having that kind of success.

And when the competition doesn't, they tend to try to drop them, get a little more share and get some equipment out.

So I think that is what I was referencing and that is what we are seeing a bit, that maybe there is a little more undisciplined pricing going on in the future.

All right.

You talked about Haynesville and Eagle Ford, but when you look at where you see the ability to put these incremental compressors to work, are there any particular markets besides those that jump out where you see some opportunities that maybe aren't as obvious to those of us on the outside?

Well, we think there is still opportunities just in our existing areas.

We are still -- we are starting to see growth in the Barnett, we are starting to see just a little bit in the San Juan.

The San Juan is primarily a marketshare situation while the Barnett, there's actually some new stuff going on.

So the existing areas we think are going to be a little contributor in addition to these other areas that may be coming on.

Our Michigan area, of course, is not any -- not a -- it is about our third-largest area and not a big contributor one way or the other as far as going up or going down, but it always holds steady and we have a commanding share up there.

So existing areas look good going forward, we have got the infrastructure there and the ability to service those as we stand.

And we did open a new area in the northern Rockies in [Verona], Utah last quarter, so we actually saw some activity we were able to grab there throughout the year.

Standard areas, some of them maybe offshoots from some of the standard areas in addition to these new areas coming on we think is what is going to layer in our growth going forward.

All right.

One last one if it is okay.

Any sense that, with the strip stabilizing here at about five, that maybe some of the wells that were shut in last year, maybe people are saying, hey, on a truly variable cost, (inaudible) bring these back on?

Yes and we are seeing a little of that.

Again, it is not a big rush.

The operators really still stand pretty conservative gas-wise.

Certainly $5 is actually more than what I thought it would have been at this point of the year being with storage and pricing and weather and everything else, but a good hot summer always helps things.

So I think the pricing is a little better than I would have anticipated.

And that is what is driving some of the improvement we are seeing.

I think we are getting a little uplift from that, but still I think there is still a very conscious attitude out there from operators and everybody is still very cognizant of the economics of things and how they are making money and what the costs are.

So we are still in that fighting mode from that respect.

All right.

Well, good deal, man.

Thanks.

(Operator Instructions).

At this time, we have no further questions.

Okay, thanks, Erica.

Just want to make sure that, as always before I close, I want to thank all of our employees for their continued hard work.

Their efforts allow us to retain the leadership in the industry that we have been able to establish.

I always want to make sure that they know it is certainly appreciated.

Again, we are happy with the quarter.

We are seeing some signs of some resurgence in activity.

All major financial indicators of ours have improved sequentially, so it looks like there is some positive things going on.

We are going to continue to execute and keep things there, but the margins are holding and it looks like there is some top-line growth going to happen.

So I thank everybody for joining me on the call.

I appreciate your time and looking forward to visiting with you again next quarter.

This concludes today's conference call.

Thank you for attending.