Natural Gas Services Group Inc (NGS) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group first quarter 2011 conference call.

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

(Operator Instructions) Your call leaders for today's call are Leann Conner, IR Coordinator, Steve Taylor, Chairman, President and CEO, I would now like to turn the call over to Ms.

Conner.

You may begin.

Thank you, Erica, and 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 and they are made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements, as you may know, involve known and unknown risks and uncertainties, which may cause Natural Gas Services Group's actual results in future periods to differ materially from forecasted results.

Those risks include, among other things, the loss of market share through competition or otherwise, the introduction of competing technologies by other companies, and 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?

Okay, thanks, Leann, and thanks, Erica.

Good morning, and welcome to Natural Gas Services Group's first quarter 2012 earnings review.

In our earnings release this morning, you can see that our revenues and profits continue to increase in the comparative year-over-year sequential periods.

We did have a nonrecurring sale in the first quarter that I will detail later, but even without that contribution, our business continues to grow in a very difficult environment.

In the comparative year-over-year quarters, the total revenues in the first quarter of this year, 2012, increased 75% to $26.4 million from $15.1 million in the first quarter 2011.

For the sequential quarters of Q4 '11 compared to the current quarter of 2012, total revenues rose almost $7.7 million or 42%.

These large comparative increases are primarily due to a one-time sale of compression fleet equipment in the first quarter of this year.

However, I do want to point out that our sales and rental revenues increased in the same periods, even with the effects of this sale eliminated.

Since this sale will be referenced throughout the call, let me give you some background.

The sale was at the request of a good customer of ours, who wanted to purchase the equipment that they were renting.

Although we are reluctant to sell fleet compression, and in fact, this is the first time since 2006 that we have sold a number of units like this, it was a minor amount relative to what we still have rented to them.

Along with this transaction, they are buying additional new equipment from us and continue to increase their rental business.

This is, overall, a financially attractive opportunity for us; we think we have enhanced our business prospects for this customer, who, by the way, is a large and very active operator.

The sale was in two parts, with the second half of the sale being finalized in April of this year.

As we go through the rest of the numbers, they will include the effect of the sale as reported, and I will give you a rough break-out for comparison purposes before we get to the segment details.

I will also note that some of the revenue ratios, for example, gross margin to revenue, operating income to revenue, etcetera, appear to be falling.

That is only due to the mix-shift resulting from the high volume of sales this quarter, which carries lower margins.

We had about a 50/50 mix this quarter, compared to the 75% rental, 25% sales mix we have had the last couple years.

Comparing the first quarter of this year to the first quarter 2011, total gross margin increased 40%, and grew from $8 million to $11.2 million.

Sequentially, gross margin increased 14% from $9.9 million in fourth quarter 2011 to $11.2 million in this current quarter.

SG&A increased to $1.8 million from $1.4 million in the year-over-year quarters and increased $300,000 sequentially.

These increases were primarily first-quarter occurrences and should reduce, too, with the rest of the year.

As has been the case over the last year, SG&A continued to stay in the 7% to 9% of revenue range.

Comparative year-over-year quarters for operating income reflect an increase of $2.3 million from $3.3 million in the first quarter 2011 to $5.6 million in the current quarter.

Sequentially, operating income increased almost $1 million, or 21% to $5.7 million.

In the comparative year-over-year first quarters, net income increased 40% from $2.5 million last year to $3.5 million this year.

As a reminder, in the first quarter of last year, we had a gain on the sale of our old fabrication facility in Midland that contributed over $700,000 to our bottom line.

So, in fact, our operating increase is actually larger this year.

Comparing the fourth quarter 2011 to the first quarter of 2012, net income increased about $500,000 or 16% to $3.5 million.

EBITDA increased from $7.3 million in the first quarter 2011, to $9.4 million in the current quarter, or 29%.

Sequentially, EBITDA grew from $8.5 million for an 11% increase.

Fully diluted earnings per share this quarter was $0.29 per common share, compared to $0.25 last quarter, and $0.20 last year.

As a footnote, in eliminating the effects of the extraordinary sale, following our other comparative year-over-year numbers for our first quarter operations.

Taking the contribution of the sale out, gross margin would have increased approximately 24% versus 40% with the sale included.

Operating income would have increased approximately 30% verses 69% with the sale included, net income would have increased approximately 8% versus 40% with the sale, and EBITDA would have increased approximately 11% versus 29% with the sale.

I mention these comparisons to demonstrate that our base level non-extraordinary business continues to grow.

Again, our balance sheet, our total short-term, long-term debt was $1 million as of March 31, 2012, and our cash balance is $29.4 million.

Our cash flow from operations through this year was $14.8 million, or 56% of revenue, compared to $9 million this same period in 2011.

In the year-over-year quarters, total sales revenues increased to $12.4 million in the first quarter of this year, compared to revenues of $3.9 million in the first quarter of 2011.

Approximately $4 million to $5 million of this was the first-quarter effect of the one-time compressor sale, so, removing that, we had excellent inherent growth, and a good sales quarter in the overall sales business.

Sequential quarterly total sales revenues increased from $4.8 million to $12.4 million.

Compressor sales alone in the current quarter were $10.7 million, and our backlog at the end of Q1 2012 was approximately $7 million to $8 million.

Rental revenue had a year-over-year increase of 26% from $10.9 million in the first quarter of 2011, to $13.7 million this current quarter.

Gross margins were consistent at 60% for both quarters.

Sequentially, rental revenues were up from $13.5 million in the fourth quarter of '11 to $13.7 million this quarter.

First-quarter growth was impacted by the one-time sale, but we think rental growth will pick up towards the end of the year.

There is obviously some resistance in the dry gas markets due to national gas price, but our oil-based activity continues, and we think it will pick up as the year goes on.

We are not seeing any broad shut-in signals from customers, but we have had some returns to the economics of particular wells.

These have been minor, and less than I would have guessed based on natural gas prices.

We will have to keep a close eye on the summer months for any deterioration, but since this is already made, we have only five months to six months before winter demand starts to appear.

Gross margins on our rental segment did, however, improve sequentially from 57% to 60% of revenue.

We entered the first quarter with a rental fee utilization rate of 75% on a fleet size of 2,135 compressors.

Our horsepower utilization is running at 77%.

Rental compression CapEx year-to-date through March 2012 was $5.6 million.

Although there was some moving parts this quarter, we are happy with our performance.

Growth in our primary business lines continue and our movement into new geographical areas is proceeding as we anticipated.

We, of course, do have the specter of low natural gas prices hanging over our heads, and I am sure everyone is familiar with the stats.

Natural gas drilling and prices are at ten-year lows, the storage running almost 50% higher.

But the EIA report published Tuesday had some good news in it.

Natural gas consumption is projected to rise 5.1% this year compared to 2011.

This is driven by an anticipated 21% to gain, and 21% is huge, and [Power Gen] usage is over and above as 6% [of line] forecast for residential and commercial users.

Consumption growth in 2013 is close to 2%, then we'll shift to the residential and commercial sectors.

So, for the next couple of years, including this one, there is a good, broad-based growth curve developing.

Natural gas production grew 7.9% in 2011.

The projected growth for 2012 is down to 4.4%.

It's still growth, but it is finally an indication that lower rig caps is the starting to make an impact.

Some experts even predict lower growth because the full effect of these lay down rigs won't be felt for the next few months.

Combining higher consumption rates with lower growth of supply, results in an average Henry Hub gas price forecast of $2.45 this year.

Being that Henry Hub was $1.95 in April, means that natural gas prices should approach $3 by end of this year.

The June futures price this morning was $2.45.

Price in 2013 is projected to be no lower than $3, and ending up between $3.50 and $3.75.

Most interesting is that EIA's forecast puts the low point for natural gas prices between January 2011 and December 2013 at the second quarter this year.

That is right now.

If they are right, we are at the low point with increasing prices forecasted for at least the next 18 months.

I personally quit forecasting price trends when I told everyone last fall that natural gas always increases in winter.

Well, it doesn't, so I am leaving the prognostications to the other experts.

I did, however, say in the first quarter of 2011 call, that natural gas is moving toward its rightful spot as preferred fuel, and I think the EIA report bears that out.

It is certainly encouraging, and if true, NGS should be a prime recipient as usage increases and prices trend higher.

I will wrap-up with some brief comments on our fracturing controversy, a controversy pretty much invented by the EPA, our current administration, and their supporters.

This has already been a full call, and I won't spend much time on it, but I didn't think I should let the fact pass that the EPA is now zero for three when it comes to fighting the elusive, might I say nonexistent, link between fracturing and groundwater contamination.

In spite of the fact that there have been multiple studies over the years that have never, ever established a cause-and-effect between fracturing and contaminated groundwater, our bureaucrats at the EPA refuse to let pesky things like facts stand in the way of giving us a world in their image.

Recently, the EPA dropped its claim that Range Resources had contaminated the drinking water in Parker County, Texas.

District three happened after they threatened the Range with huge fines if they didn't identify the source of the contamination, clean it up, and supply water to the local residents.

Oh, and the EPA bypassed the Texas Railroad Commission, which just wasn't acting responsibly.

Now, considering the fact that the Railroad Commission concluded that the gas in the water sources caused by a natural seed, Range has decided to appeal the ruling, and during a railroad commissioned administrative hearing, the judge noted that an environmental consultant in the matter personally knew the Regional EPA Administrator, Al Armendariz, that there was an intentional effort to mistake facts by the consultant, and that there was evidence of a conspiracy to defame Range.

After the EPA dropped their case, the Railroad Commission accused the EPA of, quote- Fear mongering, gross negligence, and severe mishandling -unquote, of the case.

In their response, the EPA said they dropped further pursuit of their action because, get this, in quote- Allows EPA to shift the agency's focus in this particular case away from litigation and toward a joint effort on the science of safety of energy extraction -unquote.

How do you spell, BS?

This is only their most recent defeat; the EPA also had to agree to retest the alleged contaminated water in a Wyoming accident because their methods were questioned by the state and others.

In Pennsylvania, they angered state officials there by conducting an independent analysis that not only confirmed the state's finding that water once tainted by the state -- once tainted by gas, was now safe.

Besides the egregious manner in how these bureaucrats approach things, it is interesting and validating that it isn't just the oil and gas industry complaining, it is also the actual state regulators crying foul over their tactics.

In spite of all this, and contrary to the fact that states effectively regulate fracturing, and have forever, the federal government is proposing their own regulations.

Apparently, if you can't intimidate or fine a Company out of the fracturing business, there may still be a chance to over regulate them.

Remember, the city agency that had Al Armendariz as a recent Regional Administrator, recent because he had to resign last month after he said that he would use threats and coercion as enforcement practices.

He certainly lived up to that promise.

It is absolutely a miracle that any of us have survived the paramount incompetence of this agency.

That's the end of my prepared remarks.

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

Ladies and gentlemen, at this time, we will conduct the question-and-answer session.

(Operator Instructions)

Joe Gibney, Capital One.

Thanks, good morning, Steve.

Just curious if you could help us calibrate a little bit on 2Q, and how we should think about the rental fleet count with another round of the sales happening in 2Q, coming out of the 1Q event?

Well, we -- the lower $5 million we spent capital in Q1, actually, if I remember the numbers right, built -- we built 35 or 40 units, so I think the net effect was about 15.

I would guess we probably have a same to a little higher net, maybe 15% to 20% to 25% net increase in the fleet once we make up the sale in Q2.

Okay, and I apologize if I missed this in your prepared remarks, but did you give the dollar amount of what that sale was in the first quarter?

I missed it.

Yes, it was in the range between $4 million and $5 million.

What were your compressor sales margins?

Low 20% still, with the GAAP figure?

Yes.

Okay, got you.

Last one from me, just curious where we stand on broader pricing on the rental side.

I think last quarter, you indicated year-over-year average rental pricing was plus 2% holding the line.

Does that still stand today, given some of the noise on dry gas space and shifting, and some of the pressures on the dry gas side?

Yes, I looked at incremental pricing, the overall pricing gets diluted by what's out there, versus what's going out.

And I looked at incremental pricing, and I didn't put this in the remarks because it looked, frankly, a little better than what I wanted to say, but the incremental -- all of the units that we have put out in Q1 this year versus the average in 2011, we are running about 5% higher in price on the average unit, now.

Again, the 2011 units, we put out about 200 of them.

We have put out about 30 or 40 this quarter, so there is a little difference in magnitude, but it looks like the pricing is certainly increasing a bit.

I think it's still a good comparison from the point that most of the stuff is going into the oil plays.

So we are seeing pretty good pricing in these oil plays and offset where we think the growth is going to be by the next year.

Now, we may see additional growth if this pricing -- if this natural gas pricing does continue to firm and dry gas stuff comes back, but right now, pricing looks pretty good.

Gary Farber, CL King.

Yes, good morning.

Just a couple of questions, I don't know if you gave it out on the call already, your rental utilization rate is approximately how much now?

75% on unit count and 77% horsepower.

Okay, and can you quantify the percentage of the overall fleet that's focused on liquids right now?

By the end of Q1, it was about 20% -- I mean end of Q4, sorry.

2011 was about 20%.

So it is inching up, it's probably -- it's not going to change a whole lot, just on a quarterly basis, but I would guess we are up a point or two.

Right, and just lastly back on the question on the sales margins.

I just want to be clear, the product that you actually assembled and sold, what kind of gross margins did that product have?

That is going to be the same traditional margin.

(Multiple Speakers).

Like the 30% range?

Huh?

The sales stuff is in the 30% range?

No.

Comparison sales stuff is in the 20% range.

(Operator Instructions)

Ian Bruce.

Ian, are you on the line with us?

Hi Steve, can you hear me now?

Yes.

Okay, sorry.

One quick question on your CapEx budget.

I know last quarter, you had mentioned probably a $25 million to $30 million CapEx budget for 2012.

Has that stayed consistent for the rest of the year?

Has anything changed in your mind on that front?

Well, I think we are a little over $5.6 million, Q1.

Maybe just if you annualized that, that's $22 million, $23 million.

We are thinking there is going to be somewhat of a ramp-up towards the end of the year.

I would still stay with that $25 million to $30 million.

We will probably hit right in middle of it, maybe, but we still think there is -- based on the oil activity continuing, we are having a pretty good look in the new areas we're moving into, and penetrating and putting equipment in.

Again, if this gas price does hold, and I think it looks like it might, we think the rest of the year is going to accelerate just a little.

Okay, and then on utilization, I know historically, all of your oil plays have been basically 100% utilized.

Is that number going to drop off a bit now that you guys have been doing oil for a couple of years now, is there some equipment that might be coming off, and bringing down that oil-based utilization rate, at all?

Not yet.

We are still building, and all that stuff is still going out, so we don't see -- and just what we project the rest of the year, we don't see much change in that.

Now, again, we think the growth rate in the capital fleet additions will slow down a little this year, just because last year was such a flush, and plus, we are thinking maybe we can use some of the -- hopefully, move some of the equipment out of the fleet.

But so far, it is still staying pretty vibrant and we are still thinking it will.

What happens is, even if the equipment comes off one of those wells, it goes right back on somewhere else.

So it doesn't even skip a beat, hardly.

Right, okay, great.

Last question.

Just in terms of cash management and capital allocation, you guys increased cash by about $13 million this quarter, so you're at about $30 million now.

Is that a comfortable level for you here on out?

It seems slightly high, but I guess, given concerns about the natural gas market, maybe you are trying to be a bit safe.

Can you talk about capital use for the rest of the year?

Yes, it really jumped this quarter from that sale, and then we are spending off a lot of operating cash.

With only about a little over $5 million spent, we made more than that.

It is, I would say, it is a little high.

But as we ramp up, if you look at over the year, $25 million to $30 million, that is not too far off of operating cash.

Maybe we might add a little throughout the year.

But, yes, we will kind of keep that in there a bit, we had some of the same questions -- since 2009, we built a lot of cash.

When this thing turns, we spend a lot of cash just building the fleet.

We don't want to get into a situation of not having the cash to take advantage of opportunities and things like that, and that is actually what has driven a lot of this oil stuff.

We were able to move pretty quickly into these plays and build equipment where some competitors couldn't.

So that cash comes in handy when nobody else has got any, and everyone needs equipment.

Right now, we are not going to just sit here and build cash until it's some astronomical number and hoard it, or anything like that, but we think the markets will pick up for next year or two, to where that cash will be required.

Then, like you say, it doesn't hurt to have a cushion in this market right now.

We have been able to pretty effectively build the cash and manage it.

I think we will -- right now, we are just going to be steady as it goes for the rest of the year and see what it looks like.

Craig Hoagland, Anderson Hoagland.

Hi Steve.

I may have missed this, but could you talk about, or just go over the size of the increase in the rental fleet in the first quarter?

Yes, we had a net increase of 15 units.

But, that net took into account the total that we built less what we sold.

We built in the 30 to 40 range, and I am trying -- guys, I am intentionally being a little vague about some these numbers.

I don't want to be, from a competitive standpoint, I don't want to tell exactly what were doing on some of that stuff.

But yes, we built in that range, then netted out to 15.

Okay, and that build rate, would you expect that to continue into the second quarter?

Yes, I think so.

As I have mentioned, we think -- we anticipate the quarter-to-quarter growth to even be picking up a bit on the rentals.

Because certainly, in Q1, we had a negative impact from the equipment we sold; that rental went away.

Although we still grew it, certainly the growth would have been appreciably higher with those rentals on there.

So, we will have that from Q1 and Q2, and then I think you'll start seeing the underlying -- we will still grow in those quarters, but you start seeing a higher growth rate in Q3 or Q4 just because the effect of the sale will be over.

Q2, we will see similar one-time sale numbers, similar dynamic in the fleet?

Right.

Okay.

Could you give us a little more color on how your gas customers are viewing the environment, and the decision to shut-in wells or keep wells operating, and if that is affecting the churn you are seeing in the gas fleet?

Well, it's just all over the board.

But as I -- everyone has different views of how they are doing, and everybody has different cost structures, different basins, or different situations.

But obviously, it is all coming down to the same decision, looks like, there certainly doesn't seem to be panic from the standpoint of operators and having to, like we saw in 2009, just shutting-in things right and left.

I will tell you, with the last 30 days with the gas price coming up, in fact, it has come up 20% in the last month, which nobody anticipated.

And certainly, no one anticipated it going down as fast as it did, either.

Yes, I think that has provided just a little bit of relief for anybody thinking of something.

Actually, just in time, because summer is typically a low-demand time.

I think the operators are -- they were in much better shape going into this gas price lull than where everybody was in 2009 when it dropped it precipitously, very quickly.

I think everybody is of the mind that keep pumping what we can, and like I mentioned, there is some wells that you get equipment back just normally.

Our churn hasn't really increased, and our amount of equipment going out has stayed pretty steady, so that's why I'm not too concerned about what's going on right now.

Again, as I mentioned, I quit forecasting six months ago.

(Laughter) So I'm not going to guarantee anything, but just some of the internal measures we look at, look like they are holding.

Jon Braatz, Kansas City Capital.

Good morning, Steve.

Could you talk a little bit about maybe the reasoning or the rationale that your large customer opted to purchase some equipment, as opposed to rent it?

And, are they making more of a statement on what they see ahead, or is it just a simple economic decision that they opted for?

I think it was just -- as I mentioned, the amount they bought was -- there was really three aspects of the sale.

Number one, what we sold them; number two, they bought some additional new build equipment that we are going to build for them; and three, they are going to continue the rental business.

I think it is just a particular -- they saw some particularly good economics in some areas with some real long life stuff that they figured, well, you know what, we will just go ahead and buy this.

As a mentioned, what we sold is not an appreciable amount of the stuff that we still have rented out there, and what we project to still rent this year.

So I think it is just a spot sort of thing that this is all oil shale-based, and I think they obviously, have some good wells and other things, that it will be a long time.

And they liked the equipment, and thought they would just take some of that off the table.

Any reason to expect, maybe some of your other customers to do likewise?

I don't.

Never say never, but as I mentioned, this is the first time in five or six years we've even had a request like this.

In 2006, it was about the same number of units, but of course, our fleet was about half the size.

This is even smaller effect.

But, I don't -- every once in a while, we will get somebody wanting to buy one or two or something like that, and that is typically what you get, and those aren't any big deal.

Just sometimes we sell, and sometimes we don't.

This is a little bigger piece, but I don't anticipate that, because, what you get in a market like this, and really, rental is your better way to go.

When things are kind of uneven, there is not a whole lot of reason to put capital out there on some things you might not need for longer term.

Obviously, they saw these as good wells, they are going to be out there a long time, and a good established, active area they are going to be in.

Joe Gibney, Capital One.

Hey, Steve, just one quick follow-up on the $12.4 million on the sales revenue for the quarter.

What was the non-compressor piece of that, you know, flares, rebuilds, etcetera?

Oh, how much?

Yes.

Let's see.

It was about -- right around $3 million.

$3 million.

All right, thanks.

I appreciate it.

Jeff Spittel, Global Hunter Securities.

Thanks.

Good morning, Steve.

I wanted to touch on, you guys were really first movers in a lot of these oil plays.

Are you starting to see some evidence of some of your competitors being able to mobilize some equipment in there?

If so, are they behaving reasonably rationally, or are you seeing any discernible trends in terms of pricing?

Yes, well, everybody is moving into this stuff; you have to be a mushroom not to know what's going on.

Yes, people are coming in, but we have always had pretty good, and I think these oil shales are the same way.

We have pretty good luck moving in, we have good equipment, good service, and we pay attention to the customer and what we are doing.

We were able to get in there, and get traction pretty quick, and get the equipment moving in.

That's what we are seeing.

There is probably three oil shale plays that we have started moving into significantly within the last 12 months, so there is always people going into that thing.

From the rational behavior aspect, certainly, the oil plays, I think, that's a little better.

Because everybody, I think, knows that you can -- you don't have to be cut in price to get some work in there, and things like that.

I think there seems to be some holding.

Now, I don't know if there is -- we haven't really seen any price increasing going on, and stuff like that.

Now, our price has been able to trend-up, that we haven't really seen an overt thing on, hey, prices are going up for this or that.

We tend to do it on a per job basis and move it in, and we have always been more of a premium [pride] provider, but, so far, so good.

Now, the dry gas side, you get a little different story.

There are still some snags going on there, but we are holding our own there.

We think we are staying pretty even on the dry gas side.

Even in areas that really aren't growing, dry gas wise, we are able to -- we are taking some share by moving other people out.

But the story is the oil stuff, and so far, that seems to be holding up well.

Okay, that's encouraging.

Then, maybe just some qualitative thoughts on how you expect things to evolve in the flare business this year.

I would imagine still behaving pretty well, for the most part.

Yes, we had a big surge in flares in Q4 2011, of course, everybody trying to get money spent and everything else.

Q1 is back to more of a normalized level, but, that is still a good business.

I think it's still going to be pretty active.

Our margins are holding in, and everything else.

We are actually going to be trying to push that business just a little more in some other areas.

So, we think it will be just -- last year was a record year, and we think this year will be just as good or on track to be just as good.

Sounds good.

Great quarter, Steve.

Appreciate it.

At this time, we have no further questions.

Okay, well, I appreciate everybody's time and questions, and for joining us on the call today.

We look forward to visiting with you again next quarter.

Thanks.

This concludes today's conference call.

Thank you for attending.