Natural Gas Services Group Inc (NGS) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Natural Gas Services Group announces its first-quarter 2010 conference call.

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

(Operator Instructions).

Your call leader for today's call are Modesta Idiaquez, IR Coordinator, Steve Taylor, Chairman, President, and CEO.

I would now like to turn the call over to Ms.

Idiaquez.

You may begin.

Good morning listeners.

Please allow me to take a moment to read the following forward-looking statement prior to commencing our earnings call.

Except for the historical information contained herein, the statements in this morning's conference call are forward-looking.

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

Steve?

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

2010 was obviously a tough year for our company and the industry.

While oil producers and suppliers enjoyed robust pricing and activity, our industry continues to swim up-current against low commodity prices and utilization.

In light of all this, however, NGS did much better than our competitors and the industry as a whole.

We have been able to maintain our margins while continually generating appreciable levels of cash.

I'll go over the successes we had and also touch on the challenges we see.

As I review the numbers with you, the picture they portray will reflect what we experienced, a steep drop in 2009 with a gradual recovery in 2010.

As such, the full-year comparisons will be generally less meaningful than the quarterly ones.

Looking at total revenue and due to the continuing depressed natural gas market, revenues for the 12 months of 2010 were down 20% when compared to 2009, declining from $67.8 million to $53.9 million.

In the year-over-year quarters, however, the fourth-quarter 2010 revenues increased to $16.2 million from $14.6 million in the fourth quarter of 2010.

For the sequential quarters of Q3 '10 compared to the fourth quarter of 2010, total revenues rose $2 million or 14%.

We've seen rental revenues increase for five quarters in a row with higher levels of compressor sales contributing to our quarterly revenue increases.

Overall gross margins declined from $35.6 million in the full year 2009 down to $29.2 million in 2010, or 18%, but rose as a percentage of revenue from 53% to 54%.

Comparing the fourth quarter of 2010 to the fourth quarter of 2009, total gross margin increased 13% from $7.1 million to $8 million.

Sequentially, gross margin increased 4% from $7.7 million in the third quarter of 2010 up to $8 million in the fourth quarter the same year.

Comparing the full-year periods, SG&A declined over $300,000, or 5%, to $5.9 million in 2010.

Throughout these periods, we have continued to manage staff levels, pay attention to discretionary spending, and keep our focus on execution.

Operating income for the 12 months of 2010 dropped 36% from the $17.8 million level of 2009.

This relatively higher percentages decline, when compared against revenue and gross margin declines, reflects the level of depreciation we carry in this capital intensive business.

As you know, depreciation is an expense that does not vary with market forces and its fixed character impacts operating income disproportionately in a declining market.

On a year-over-year quarterly basis, we saw an 18% increase in operating income moving up from $3.4 million in the fourth quarter of 2010 when compared to a same quarter in 2009.

Depreciation increased by 9% in the same period.

Sequentially, operating income increased a modest 1% to $3.4 million in the fourth quarter of 2010 while depreciation grew by 6%.

Net income after tax decreased 36% to $7 million for the 12 months ending December 31, 2010.

Although the net income decline was primarily caused by the overall declines in revenues and operating margins, the average tax rate also increased from 36% in full year 2009 to 38% for the full year of 2010.

In the comparative year-over-year fourth quarters, net income increased 16% from $1.7 million last year to $2 million in 2010, with average tax rates increasing from 41% to 42% respectively.

For the sequential quarters of the third quarter in 2010 compared to the fourth quarter of 2010, net income was down 8% to $2 million.

This decline is entirely attributable to a 42% tax rate we incurred in the fourth quarter of 2010 compared to a 36% rate in the prior quarter.

This upward tax adjustment was caused by lower-than-projected tax deductions from the domestic manufacturing tax allowance.

This resulted in a $0.02 per share impact to our earnings in this quarter.

A flat 36% rate across both quarters would've resulted in a slight rise in net income.

EBITDA for 2010 was $23.4 million, a 21% decline from 2009, but held steady in 43% to 44% range as a percentage of revenue.

EBITDA increased from $5.9 million in the fourth quarter of '09 to $6.6 million in the current quarter of 2010, which was the fourth quarter, for an 11% growth.

EBITDA grew from $6.4 million in the third quarter of 2010 up to $6.6 million in the fourth quarter of 2010, a 3% increase.

Fully diluted earnings per share for the fourth quarter of 2010 was $0.16 per common share, compared to $0.14 in last year's comparative quarter and $0.18 last quarter.

I do want to point out that our gross margin, operating income, net income before tax, and EBITDA were all at their highest levels this quarter than in any of the past four quarters and have grown in each consecutive quarter.

Total sales revenue declined almost 43% for the year 2010 compared to 2009.

The gross margins increased from 31.3% last year to 35.2% in 2010.

In year-over-year quarters, total sales revenues increased 12% to $5.4 million in the fourth quarter of '10 as compared to revenues of $4.8 million in the fourth quarter of 2009.

Margins also went up from 29% in last year's quarter to 32% for the current quarter.

Sequential quarterly total sales revenues improved from $3.7 million to $5.4 million while margins moved down from 40% to 32%.

This increase in revenue is due primarily to completion of recognition of some of our compressor sales backlog from last quarter and again demonstrates the volatility of this segment, especially in this market.

Compressor sales in the current quarter were $2.9 million with a gross margin of 13%.

This compares to last quarter when compressor sales were $1.4 million and the margin was 41%.

This wide swing in margins was due to disparate bidding decisions made based on the particular competitive situation.

The third quarter of 2010 involved more international specialty work, while Q4 was a successful effort to capture a couple of new customers in a bid situation.

While we and the industry have been hit hard in the custom fabricated sales market, we see it as a positive development going forward.

Compressor sales revenues now run between 10% to 20% of our total revenues, which is down from 40% to 50% of revenues in more active times.

This business has always been variable and hard to predict.

With the smaller revenue component and relatively lower margins, it now has a lesser impact on our bottom line.

Our backlog at the end of the fourth quarter of 2010 was approximately $1.3 million, which was the level of sales in the third quarter of 2010.

Compressor fabrication tends to be a just-in-time business nowadays.

We have jobs that we have bid with some likelihood of success; we aren't counting those chickens yet.

Now, looking at compressor rentals, for the calendar year ended 2010 compared to 2009, rental revenues decreased 10% down to $40.7 million.

Gross margins in 2009 were 63% compared to 60% in 2010.

Our rental revenues in 2009 and 2010 have fallen only 5% to 10% from the record levels we saw in 2008.

This is a test of the strength of our franchise.

Rental revenue had a year-over-year quarterly increase of 11% from $9.5 million in the fourth quarter of 2009 to $10.6 million for the current quarter.

Gross margins were essentially steady at 59% and 58% respectively.

Sequentially, rental revenues were up from $10.3 million in the third quarter of 2010 to $10.6 million this quarter, with gross margin ticking down 1% to 58%.

The fourth quarter of the year typically has a seasonal tinge to it from higher expenses as winter sets in, but we also had the impact of a higher payroll base, since this is the first full quarter since we lifted our wage freeze that was implemented in 2009.

Of course, the really cold part of winter hit in Q1 of 2011, and we expect some impact from that too.

From a pricing perspective, the average monthly rental rate of an active unit in 2009 was $2850 a month, compared to $2750 per month per active unit in 2010.

This is a 3.5% decline in average rent across active fleet.

Relative to the declining competitive market in 2010, we think we've been able to hold pricing to an exceptional degree.

We ended the fourth quarter with a rental fleet utilization rate 69% on a fleet size of 1909 compressors.

While utilization has held steady from last quarter, it was in the face of a 3% growth or 60 more compressors in fleet size.

It may be obvious, but the way you grow a rental business is to rent more than you get back.

Utilization rates are a good indicator, but a bit more insight can come from the rate of acceptance relative to the rate of terminations.

In 2007 and 2008, both very busy years, we set about two units for every one unit that was terminated.

But in 2009, that ratio flipped; we got back about two for every one set.

Although still below the ratio of more active times, 2010 improved to roughly one [heffians] being set for every one terminated.

This is certainly a positive trend.

While our terminations are about 20% higher than in our busiest times, we're within spitting distance of the most favorable ratios.

With a rental fleet currently at 1909 compressors, we've already built more rental units year-to-date, 133, than last year, and in fact the 60 we built in Q4 exceeds the full-year production of 2009, which was 46 units.

Over the past couple of quarters, I've projected that we could add up to 100 to 110 units to the rental fleet this year and we exceeded that estimate.

Rental CapEx for full year of 2010 was $21 million, compared to the $9 million we spent in 2009.

We anticipate spending between 100% to 120% of that level in 2011.

Turning to the balance sheet, our total short-term and long-term debt was $2 million as of December 31, 2010, and cash on hand was $19 million.

As an appreciation of the cash [it] continues to generate, even in disappointing markets, we spent $21 million in CapEx in 2010, $12 million more than in 2009, and our CapEx balance is only $4 million less than last year.

We announced in the fourth quarter that we had initiated a new line of credit and a new banking relationship with J.P.

Morgan Chase.

It is a $20 million primary line with a $20 million accordion feature.

We are able to choose between LIBOR or prime rate adjustments.

We have no commitment or usage fees, and the interest rate is variable according to our EBITDA leverage ratio.

We are continuing to amortize the $2 million in the line of credit as if it were a term loan.

Our cash flow from operations for 2010 was $29 million, compared to $32 million for the full year of 2009.

Despite of a year of depressed revenues, this is only an 8% decline in operational cash generation.

Operating cash flow per share in 2010 was $2.36, which is a calculated 12.5% cash return based on the 2010 year-end stock price of $18.91.

From an operating perspective and considering the market, we are satisfied with the position we are in.

Satisfied doesn't necessarily mean happy, and I think we can make further inroads in our rental markets this year.

It's another slam-dunk because although our rental activity is showing signs of life, it is not broad-based.

It is spotty by geography and by customer, and some areas are treading water.

We are starting to evaluate new markets and I anticipate moving into one or two at the end of this year.

(inaudible) activity is, as always, very volatile in a quarter-to-quarter fight.

Visibility in the business continues to be murky, and I don't think we're out of the woods there yet.

We will start seeing some cost pressures.

I mentioned that we lifted our wage freeze and we will start seeing increased field costs, especially from an oil, lubricants, and parts perspective.

Suppliers, especially those not tied exclusively to the natural gas markets, have already started announcing price increases.

Some competitors continue to try and grow their business by cutting rental prices.

But I think they may finally be seeing the folly of that and seem to be subsiding somewhat.

It's not gone but certainly much less of a factor.

Our view of the general market is no different than anyone else's.

There continues to be an oversupply of natural gas due an aggressive drilling activities, which of course results in lower gas prices.

This isn't a difficult scenario to construct.

We do, however, have a bit of a counterintuitive take on how it will affect NGS.

We like higher gas prices as much as anyone and look forward to the day that they reach their appropriate energy parity.

We will also see opportunity no matter when that day arrives.

Since the majority of the current wells being drilled today are shales, gas shales, with high decline rates, it's only a matter of time until they will need (inaudible) compression.

Shale drilling and its subsequent production continue to provide market opportunities for us.

There's been a lot of talk about operators moving away from gas and towards an oil and liquids bias.

This moves rigs off gas, which is a good thing in this market, but these wells also typically require wellhead compression, either for low-pressure sales compression or for gas lift applications.

We are seeing more and more of this.

In fact, these jobs have favorable economics because liquids help subsidize any economic shortfall gas may have at today's lower price levels.

Liquids plays provide a market opportunity for us.

From a pricing viewpoint, many think that natural gas prices will be at low levels, $5 to $6 in five to ten years.

Maybe they will or maybe they won't.

But NGS has proven its ability to effectively and profitably compete in down markets, so the threat of lower prices tends to encourage us from our own competitive position.

Low pricing provides a market opportunity for us.

There's been much talk and speculation about the number of drilled but uncompleted wells, and has generally been a feared component from the perspective of overhang.

We see it merely as inventory wells that will need compression in the future.

In fact, they may come to market sooner rather than later due to [sub] costs that need to be recovered.

These wells provide a future market opportunity for us.

Barring another economic calamity like the one we are just emerging from, we think we can profitably grow in any of the purported negative scenarios just mentioned, and in fact have.

So we reframe the question from whether we will grow in any particular market to what the rate of growth will be.

For NGS, commodity pricing will not determine whether we grow, but only how fast.

As a final anecdote, we've heard of three to four smaller competitors selling, recapitalizing, or going through different forms of realization.

[Not] that these provide any particular M&A opportunities, but I think demonstrates the strength of our strategy and business model.

We've concentrated on the wellhead compression market with an unconventional gas focus and have performed and have outperformed many if not all in our execution.

Now, from a national perspective, I was worried about which of the many subjects I should comment on, but the Middle East turmoil is a natural.

During a time when I would think we would want to engage in an accelerated dialogue about becoming more energy self-sufficient, the present administration continues on the same path as the last two years, seemingly without knowing or caring about and most likely ignoring the changes going on around them.

The US continues to hamper offshore drilling eight months after Macondo.

Their delay in approving valid applications to drill in the Gulf after the "reopening" of the permitting process is a default prohibition.

It was only after rising political pressure that the first permit was finally granted within the last couple of days.

For the second year in a row and with as many defeats, this administration is still trying to raise taxes on the oil and gas industry.

A higher tax on any industry reduces its ability to re-invest, and I am incredulous that, in this environment, no move has been made to reconsider, especially at a time when it seems to me that we should be growing and investing in our domestic energy businesses.

This administration just expanded the ethanol subsidy, even though this industry still can't be competitive even when they are subsidized, protected and mandated.

A dismal failure, not even considering that ethanol is an energy negative product and includes at no extra cost detrimental second-order effects of driving up corn and farm prices.

Now, we come to the least common denominator, solar and wind.

When this country needs a relatively quick solution to its energy needs, and by quick I mean in the next five to ten years, this administration continues to pour billions of dollars into energy sources that will not be competitive or of any consequence for 20 to 30 years.

We now hear recently that there is talk of using the strategic petroleum reserve to mitigate prices.

This is sheer price and political manipulation.

Shell and Exxon Mobil released their standard reports recently that said essentially the same thing.

A continued growth by emerging economies will drive energy use to highs we've never seen before.

Without enough supply, there will be widespread conflict of economic dislocation.

So with all of this going on, our president was asked the other day about the Middle East crisis and the potential for supply disruptions.

His reply, and I quote, "We can just ride out any shortage related to the Libyan crisis." What?

That's our response?

Just hunker down until the dark cloud passes and hope it doesn't get too bad?

What is the strategy if Saudi Arabia begins to have domestic problems?

What this administration is doing does nothing, absolutely nothing, to secure our economic and strategic security, [putting] hopes on wind, solar and biofuels while the world witnesses once again the very real potential for serious supply problems with nothing more than political calculations, and very dangerous ones at that.

Tell you what, this administration is about to wear me out.

(inaudible) criticizes (inaudible), I do have a solution that is not new.

It is natural gas.

Of course, I've always been a proponent, but I saw a graph the other day Encana drafted that convinced me even more.

What it showed was that an additional 25 Bcf per day of natural gas added to the domestic energy mix in the US would reduce our dependence on imported oil from our current 44% of supply to 9%, 9%.

That's something we can ride out.

How hard would that be?

Easier, cheaper and quicker than the policies being followed now.

To close my call, as usual, I want to thank our employees for their continued efforts.

Our team continues to get stronger, and we know it takes every one of us to achieve the results that I get to report.

I'm proud of all of them.

That's the end of my prepared remarks.

I'll turn the call back to Erica for questions that anyone might have.

(Operator Instructions).

Matt Beeby, Global Hunter.

Thank you.

Good morning.

Let's start with the rental fleet I guess.

You mentioned the oil window and the applications driving some of the need for compression.

Can you quantify, I guess maybe in terms of percentages, the new units that you're putting out now, how that's broken out between the sites where the oil is the main component versus gas?

I'd guess probably right now, that's really the driver, much like everybody has seen and heard and talked about, you know, operators moving towards the oil and liquid-rich plays.

That's pretty much where our new business is coming from.

So I would peg it at probably 60% to 70% of the total is in plays like that now.

You added 60 units.

I think expectations were probably closer to half that.

Is that a pretty good number that you feel confident is a baseline going forward?

Then how do you balance that with utilization?

It seems like we're kind of in the high 60s%, maybe 70%.

Are those good baseline numbers as we look forward into 2011?

Well, as far as going forward, I don't -- we spent about $21 million, built 133 units, and think we will be between 100%, 120% of that capital spend.

So all of that is going to point pretty directly to the number of units too.

So it wouldn't be necessarily a 60% per quarter run rate like that, so if you go 100% -- the high range, 120% of the 132, maybe 150, 160 units, so we had a little more build in the fourth quarter.

I'm not going to venture to say it's going to stay that high but, again, I think we could probably ramp up to the highest of 20% more than that.

From a utilization standpoint, we kind of penalize ourselves at the same time as we are getting this equipment out, because certainly, as we add equipment out into the field, (inaudible) goes into the denominator of the calculation.

So if we didn't have that effect on the numerator and the denominator, of course that utilization would be climbing pretty quickly.

So we are just kind of in that range right now where the utilization is flat because as about as many as we add, we're just getting (technical difficulty) percentage ticks on the utilization from what's going out now.

All the stuff we're building is going on contract.

As I mentioned in the past call or two, we are not building any compressors without signed contracts going forward.

So our incremental build is 100% utilized, but as the fleet gets bigger with those being added, we are just -- that utilization is not as steep a slope now.

I will add where we will start getting real utilization growth is a little better gas price, just like everything else.

Of course, gas price revenue solves a lot of problems, but once we start being able to pull out of the yard more so and get some of the idle equipment out, that's when you really start seeing that utilization start to tick up in a more definitive manner.

That may be back after this year in 2012?

Yes.

It's -- I'll let all you guys predict the gas price.

There's -- I read a lot of reports, in fact last week some presentations from different "energy experts" around the country, four or five or so I guess.

It's all over the board.

The experts aren't even sure.

So I'm not an expert, and so I'm not even going to venture to guess what it is.

But my feel is we're, maybe get a macro impact from the point that the economy has recovered and albeit a little slow, and Canadian imports are down.

So there's directionally some good things going from a natural gas perspective.

So yes, I think the pricing is going to get stronger as we go, and I don't buy into this $5 to $6 gas for five to ten years, but as far as when that's going to happen or anything else, just directionally I think it's going up, but I'm loathe to give you timing.

I'll let others get in for some questions.

Thanks.

(Operator Instructions).

Joe Gibney, Capital One Southcoast.

Good morning Steve.

I just wanted to drill down a little bit on some of the moving parts within sales.

I know this is a just-in-time, as you referenced again, so it becomes a little bit difficult to peg.

But first, out of your $1.3 million and backlog, will all that roll off in the first quarter, or is there some that will bleed into 2Q, 3Q?

No, it will probably all come in in the first quarter.

Okay.

Another pretty solid quarter on sort of other sales [in] flares or parts or rebuilds is kind of running $2 million to $2.5 million.

Just can we expect a similar pace in the first half of the year, or is that going to start to taper a little bit?

We think they can hold up.

The flare business is really, pardon the pun, called fire.

It's just made from these oil plays, you know, oil and liquids plays, because what's happening is you get into some of these areas that the gas infrastructure isn't necessarily fully developed, and they are getting that oil, so there is some flaring going on.

That's what's driven a lot of that.

So it's been about a year.

It's always been a pretty decent business but revenue-wise it always about $2 million a year, but it's really ticked up lately.

So I think we've probably got another three or four quarters of that.

Then we'll start seeing some gas infrastructure get in and probably take away some of that flaring.

It's helpful.

In terms of compressor sales gross margins, where the rubber meets the road, I understand it can dance a lot, go to breakeven to 40% to 13% this past quarter.

But I think, given the just-in-time nature here, should we be calibrating a little bit lower directionally here in 1Q, 2Q than where we were in the fourth quarter, kind of this midteens run rate?

Yes, I think -- I mean we're certainly -- we've always had pretty good margins in that business and what drove it down in the fourth quarter to the lower right was there were a couple jobs we wanted to get, not just from the point of the revenue and the margin standpoint, but pretty good customers who wanted to get in there and show them what we could do and pretty large and technically difficult customers.

And so we decided to bite the bullet, so to speak, and get in there and get competitive, and get those jobs, so we'd have a pretty good shot going forward of at least having something (inaudible) some of these people.

So as I mentioned, a totally different bidding strategy from Q3 to Q4 depending on the type of jobs that were coming up.

But yes, I think -- we think our sales revenue for '11 will be at least the same as we saw this year with a little -- maybe a little higher.

It's just this stuff just pops up any more.

As I mentioned, we've got -- there's -- we have a $1.3 million backlog and it's probably two to three times that that's out there potential from some standpoint that we get some.

So it's very volatile, very unpredictable, very hard to figure out.

But -- and just saying we'll make about -- we expect to have the same level of sales this year, I couldn't tell you to divide that by 4 and put it in each quarter.

It's going to be the same sort of thing.

It's going to be up and down and all over the place.

That's fair enough.

The last one for me, you referenced international inquiry levels.

Is this just sort of a one-off international on the sales side where you are getting some inquiries?

Those have been, but I tell you we're getting a lot more inquiries on that stuff, more than we've had in a long, long time.

We've never marketed internationally.

We've done some stuff, have some -- couple of decent relationships, mainly south of the border.

There seems to be more and more of that coming up.

Really what's driving some of this is our little -- our proprietary CiP brand compressors, a great little compressor.

We have a lot of them in our rental fleet here, but it's getting -- the reputations are building [around] too.

So we think there's some opportunity with some of that stuff and we're actually now -- it's kind of like when you get hit with a 2x4, you pay attention.

We are starting to look at it a lot more from the point of how should we maybe start marketing a little more of this towards that range?

So I think there's some, certainly some upside and opportunity there, but that's even harder to predict than just domestic stuff.

I understand.

I appreciate it.

I'll turn it back.

Thanks.

(Operator Instructions).

Jeffrey Kerr, Kerr Financial Group.

Good morning.

A couple of questions -- on the CapEx projections, is that -- as we think about that, there's really no material costs increase coming to the system?

There are.

There's already been some price increases announced.

They are not too bad.

Of course, that's a relative term, but in the 4% to 5% price range.

So we're going to see some input costs on that capital equipment, and of course what we are trying to do is keep the rents commensurate from a return standpoint with what those are doing.

Okay.

Then the other question is can you review, from a geographic standpoint, the important -- has there been any material change in Barnett versus Eagle versus West Virginia, like that, where the product is?

No, not really, not to this -- as of this date.

We are -- the areas we're big we are still big in.

In the other areas, we've kind of maintained our positions.

But as I mentioned, there is -- we've talked about in the past all of these new shales coming on, Eagle Ford, Marcellus, Haynesville and things like that.

They are not necessary to the point yet to where we would participate in a meaningful manner yet because those wells haven't got down to the wellhead decline sort of stage where we would come in.

But we think there's other opportunities.

We've really been looking at some different markets here recently the last quarter or two, and in fact are looking pretty seriously moving into some of these from a sales perspective, and get the sales (inaudible) service thing comes.

So we think there is, as I mentioned, we think there will be one or two markets, either geographically or even product-wise, that by the end of the year we will be in that we are not now.

Have you added headcount to sales?

Yes.

Okay.

I guess the final question, you mentioned the M&A and kind of the competitive landscape and like that.

Obviously, you said there's -- I'm sure you are scowling (inaudible) but no opportunity just yet.

But does that provide an opportunity from the perspective I guess of capturing market share -- I don't want to say this -- market share from somebody struggling -- from a reputation standpoint I guess is what I'm trying to say?

Yes.

We've looked at a lot of them in the past, and none of them fit for various reasons.

Going forward, we are certainly always open to looking at competitors or companies.

Typically, those come from people calling us or soliciting us to look at something.

It makes sense to us where they would be in newer areas where we maybe wanted to get a little quicker growth profile or move in a little faster.

They don't make a whole lot of sense to us from a Barnett or a San Juan perspective because we've got commanding positions in those areas.

But for example, Appalachia, we are up there; we have been up there.

You're kind of waiting for that Marcellus to kick off a little more, but if there's somebody up there that makes sense from that standpoint, but as I mentioned before, the thing we really concentrate on is certainly you want the reputation there.

But the other thing is just what's the quality of the fleet and how it (inaudible) ours because that's -- make no mistake [there would] be the quickest way to negatively impact our margins and our expenses.

Yes.

Would you be -- I guess the way to think about that is you would be looking maybe to acquire compressors that are already in place in Marcellus in that way, are you thinking?

You mean compressors versus companies?

Yes.

When you enter the fleet, there is really -- is there anybody manufacturing up here?

I don't think so, so --.

Yes, not -- you get -- there's fabricators up there.

But that's not -- again, we are not going to be going out and buying fabricators.

You may get a little fabrication facility when you buy a rental fleet, but just buying pure fabricators, that -- I don't want to get bigger in that business, and number two, we've got plenty of fabrication space ourselves, and all it takes is a truck to move that stuff up there.

So --

Very good.

Thank you again.

Matt Beeby.

Steve, the press release mentions that I think the expectation is for 2011 to be a trough year.

We've seen 2010 really improving in both of the segments in terms of revenues.

So could you maybe talk about what you're meaning by that?

Is that more focused on margins or utilization or what are your thoughts there?

What do I mean by trough?

Yes.

Okay.

(inaudible).

I was hoping that would be -- you want me to define a term.

I want to be very general there, Matt.

So --

I'm assuming you're not talking about earnings in 2011 (inaudible) be lower than 2010.

No, I don't think that.

I think from a point -- all I meant to say, when you look at a sign [wag], you get the up and the down, and on the down part, you've got the lead-in or the lagging edge of the valley on that thing.

I think we are -- if I characterize that to say [Taylor's] probably of the leading edge of that trough going into the depression, and then '11 may be the lagging edge, meaning it is the one headed up a little more than coming down.

So we think 2011 is going to be a better year, topline and bottom-line.

But it's not anything I'm going to write home to mom about and start celebrating.

It's still going to be a rough year; there's going to be some ups and downs.

It is going to be tough.

There's still a lot of equipment out there; there's a lot of gas out there and everybody's trying to get their piece of it.

I think we've got a -- I'm very encouraged by the applications we are getting in, the inquiries, I mean, some of the opportunities we see.

So I fully expect a better year going forward.

But again, it's not going to be an '08 or an '07 or something like that.

It's as we get into -- what we're going to -- what we've got to have is higher gas price.

Now, as I mentioned, higher gas price to us just means the rate of acceleration will grow.

It doesn't mean we're not going to grow because, as I mentioned, in some of these "negative" markets, we think we can grow in those and in fact we've proven that case in most of them.

So the trough is just a general thing from the point of -- I actually hate to, like I said -- (inaudible) throughout the quarter happy.

I'd be happier if we were having better price and faster growth and stuff like that.

So I hate to say it's a growth year.

We think it's going to be a better year than '11, but a growth year, I'll reserve that for when we start getting into the utilizations climbing quicker and things like that.

(Operator Instructions).

At this time, it appears we have no further questions.

Thank you, everyone, for joining me on this call.

Before I go, I want to wish all Texans listening a happy 175th Texas Independence Day.

For the non-Texans listening in, we do have a bumper sticker we can send you.

It says "I wasn't born in Texas but I got here just as soon as I could." So thanks for your time this morning and I look forward to visiting with you again next quarter.

This concludes today's conference call.

Thank you for attending.