Natural Gas Services Group Inc (NGS) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group second quarter 2012 conference call.

(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, 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.

Thanks, Leann, and thanks, Erica.

And good morning to everyone, and welcome to Natural Gas Services Group's second quarter 2012 earnings review.

NGS had a good quarter and our year-over-year results continue to exhibit robust growth.

As we go through the numbers, I think you'll see that operationally everything is advancing.

But we did see some quarter-to-quarter declines in some measures.

I will detail them as we go through the call, but they are primarily due to typical quarterly variances and compressor sales revenues, incrementally higher make-ready expenses, and higher non-cash SG&A costs, not to mention the comparison against a very strong Q1.

I had mentioned on the last call that our challenge this year would be to stay ahead of any deterioration in the dry natural gas areas due to low gas prices, with offsetting growth in the oil and liquids markets.

That continues to be the hurdle, and we saw some impact from the low gas prices on our rental activity in the dry areas, particularly, but not surprisingly in this quarter.

We have been able to stay ahead of it and we continue to be optimistic through the rest of the year in both our rental and sales businesses.

Looking at total revenue, in the year-over-year quarters, second quarter 2012 revenues increased 78% to $24.5 million, from $13.8 million in the second quarter of 2011.

Almost $9 million of this increase came from compressor sales, with $2 million coming from year-over-year increase in rental revenues.

For the sequential quarters of Q1 '12 compared to the second quarter of this year, total revenues decreased $1.9 million, or 7%, primarily due to the variability of compressor sales between quarters.

On a year-to-date 6-month-to-6-month comparison, total revenues were up $22 million, or 77%.

$17 million of that increase is attributable to compressor sales.

Comparing the second quarter of this year to the second quarter of 2011, total gross margin increased 35%, from $8.2 million to $11 million.

Sequentially gross margin was essentially flat between quarters at $11.2 million in the first quarter of this year and $11 million in this current quarter.

Overall gross margin did, however, improve to 45% of revenue compared to 43% last quarter.

In the comparative year-to-date periods, gross margin grew $6.1 million, or 38%.

One of the anomalies we had this quarter was an appreciable increase in SG&A.

It increased 61% [on] the year-over-year quarters and 30% sequentially.

But as a percent of revenue, it still ran a reasonable 10% to 11%.

This is mainly a quarterly variation, and approximately 70% of the sequential increase was due to non-cash accrual adjustments that will reduce over the remaining quarters of the year.

Looking at operating income in comparative year-over-year quarters, we had a 50% increase of $1.6 million, up from $3.2 million in the second quarter of 2011.

Sequentially, operating income decreased $800,000, but remained in the 20% to 21% of revenue range for both quarters.

Year-to-date operating income increased 60% this year when compared to the June 2011 year-to-date results.

In the comparative year-over-year second quarters, net income increased 50% from $2 million last year to $3 million this year.

Comparing the first quarter of this year to the current second quarter of 2012, net income was off $500,000 to $3 million, but both quarters were in the 12% to 13% range of revenue.

Our tax rate rose slightly from 38% to 38.6% in the sequential quarters.

Year-to-date net income was up $2 million, or 44% to $6.5 million.

EBITDA increased $2 million, from $6.7 million in the second quarter 2011, to $8.7 million in the current quarter, or 30%.

Sequentially, EBITDA decreased $800,000 to $8.7 million in the second quarter of this year, with both quarters in the 35% to 36% margin range.

In the comparative 6-month periods, EBITDA increased $4.1 million, or 29%.

On a fully diluted basis, EPS, earnings per share this quarter was $0.24 per common share, compared to $0.29 last quarter and $0.16 last year.

Total sales revenues in the sequential quarters fell $1.8 million to $10.6 million, but gross margin increased from 23% to 30%.

This quarterly revenue decline is part and parcel of the volatility we experience in our sales business.

And this one in particular is primarily attributable to the delay of a large custom fab compressor delivery due to customer spec changes.

Recall also that Q1 of this year reflected a very robust quarter due to the recognition of some compressor unit sales that were delayed from the fourth quarter 2011.

In year-over-year quarters, total sales revenues increased to $10.6 million in the second quarter of this year, as compared to revenues of $1.9 million in the second quarter of last year.

Please recall that over $5 million of this was non-recurring sales from rental compression equipment to a large customer, but the underlying increase is still noteworthy.

Looking at compressor sales alone in the current quarter, they were $8.3 million, with a gross margin of 23%.

Our compressor sales backlog at the end of this quarter is $7 million to $8 million.

Rental revenue had a year-over-year increase of $2 million, or 18%, from $11.6 million in the second quarter of 2011 to $13.6 million for this current quarter.

Gross margins were 58% and 57% of revenue respectively.

Sequentially rental revenues were essentially flat with a decrease of $70,000 to $13.7 million this quarter.

This is the first time in over 2 years that we haven't seen an increase in the quarterly rental revenues, but it was primarily the result of the effect of the non-recurring sale of rental equipment to a large customer.

While we enjoyed a good increase in sales revenues from that transaction, there is [foregone] rental revenue associated with it.

We did see an uptick in rental returns from dry gas areas this quarter, which it being the [slower] season isn't unusual, but the underlying liquids-oriented growth is still present and we anticipate rental gains through the rest of the year.

To filter out some of the noise of this quarter in rentals, if we net out the effect of the sale of rental equipment and one particularly large single customer shut-in, our rental business would have grown 4% this quarter.

Gross margin moved from 60% last quarter to 57% of revenue this quarter.

We experience routine quarterly variations in this margin, but we did have a higher level of incremental expense for make-ready overhauls this quarter.

55 units were prepared in Q1 of this year, while 97 were overhauled this quarter, an 80% increase.

A make-ready overhaul is where we inspect, repair, and prepare equipment to go out on a new rental contract.

This work is only performed when a rental contract has been signed, so it's a pretty good indicator of future growth.

Coincidentally, the year-ago second quarter exhibited this same kind of quarterly increase in overhaul expense.

I'll remind everybody that NGS expenses these overhaul costs and they go directly against our gross margins.

This contrasts with some industry practices that capitalize a large part of these costs, and, therefore, our margins are [sort of] higher, if not the highest in the industry.

We ended the second quarter with rental fleet utilization essentially flat with last quarter in the 74% to 75% range, with horsepower utilization running 76%.

Fleet size at the end of June was 2,167 compressors.

This calculates to a net addition of 47 compressors year-to-date.

But we actually built and set twice that many, 97 to be exact, when you account for the rental equipment sale.

We built a total of 57 compressors this quarter, but added 32 net compressors to the rental fleet.

Last year at this time we had built and added 120 units to the fleet.

So we are on pace with what we anticipate growth to be this year.

Rental fleet CapEx year-to-date this quarter has been $8.6 million compared to $5.6 million in Q1.

We have continued our market expansion to new liquids-oriented areas.

These primarily include the Utica Shale, Granite Wash, and the Niobrara, and they are all still growing.

There are a couple of others we're evaluating and [would] like to move into them as a customer [pool] develops.

We are optimistic that are rental growth will continue through the balance of the year.

The combination of increased make-ready overhauls, our contract-to-build schedule, and new markets point to higher levels of activity.

Gas prices could, of course, derail this.

But we think that, too, is trending up.

Going to the balance sheet, our total short-term and long-term debt was $1 million as of June 30th this year, and cash in the bank was $30.4 million.

Our cash flow from operations through the first 6 months of the year was $20.4 million, compared to $16 million for the same period in 2011, a 28% increase.

From a general market perspective, EIA, the Energy and Information Administration of the US Government, projections for natural gas production anticipate just over 4% growth this year, with demand climbing 5%, and prices projected to be $2.58 average in 2012, and an average of $3.22 next year.

These price projections have actually climbed since last quarter, intend to point to a better winter than last year followed by a stronger 2013.

Longer term, the natural gas market continues to be attractive.

For the first time ever, natural gas burned for power generation in April of this year exceeded the amount of coal consumed.

The number of coal plants slated for retirement over the next 3 years equals almost 9% of the installed gigawatt capacity in this country, and those will be largely replaced with natural gas fuel generation.

Retirements over the next 5 years of coal plants will be 400% more than what has been retired in the last 5. LNG exports will gather steam over the next 3 to 5 years, and there are plants being constructed now and others in the mix.

Bottom line, I think, is that we are transitioning to a period where natural gas will be a larger structural part of the economy, prices will be relatively stable, and consumption will grow.

In all of this, larger volumes of natural gas will flow through the system, and that's how we make our money.

Now, from the I-have-to-laugh-to-keep-from-crying department.

I started out to comment on the folly innate danger of this administration's energy policy, but there's so much to choose from.

Should I revisit the purely political decision to bow to the green lobby and indefinitely delay the Keystone Pipeline Project and how it has now led to Canada inviting China into the North American energy picture.

So they said they would if the US didn't want their oil.

Or should I comment on the continuing agenda by the EPA to hinder fracturing as the safe and reliable method it is, to help us extract the trillions of cubic feet of natural gas we've now discovered.

This, in spite of the EPA repeatedly losing their cases on the fact that fracturing hasn't been proven to contaminate ground water.

Damn those facts.

These are still dangerous ideas.

But what I'm going to talk about, I truly could not make up.

We are used to hearing about alternative energy in the form of solar and wind, and we all know that there remain problems with this widespread use, not to mention the billions of dollars wasted on it.

Well, let's discuss biomass, that alternative form that also qualifies for federal subsidies.

And they qualify because what they burn is renewable.

Yes, they do burn stuff and they do produce emissions.

Well, as you can imagine, although the feds can't, not everything burnable and renewable is clean.

Some plants can quality if they prove themselves to be carbon neutral.

That seems impossible when you burn something organic.

But, for example, the feds allow you to burn wood and produce large amounts of carbon under the premise that as wood decays it would emit the carbon anyway.

Forget the fact that one takes a minute to burn -- it takes a minute to burn a tree while it takes years for it to decay.

What we now have is an industry in which 85 of the 107 biomass plants that were operating at the beginning of this year have been cited by state and federal regulators for air and water pollution violations.

Nearly all biomass plants receive subsidies either through direct cash payments or the ability to charge more than market rates for their power.

In fact, much of the recent government funding has gone to projects that are already online.

Millions of dollars in fines have been levied on the plants.

But the ultimate resolution has at times been to use grant money to pay the fines or to raise the limits on level emissions in an effort to make the plants compliant, whether the industry would be allowed to do this.

California has, of course, been a leader in biomass, and so makes a good example of the problems with this renewable resource.

I won't go into all the details about violations and fines at individual plants.

But as an example, in one (inaudible) district in California, 3 of the 4 plants located there have been fined for violations over the last 2 years.

They all 3 burn biomass and they all receive some form of subsidy.

However, the fourth plant has a clean environmental record and received no renewable energy subsidies.

It burns natural gas.

That's the end of my prepared remarks.

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

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

(Operator Instructions) Gary Lenhoff from Great Lakes.

Just quickly, can you tell me what you believe the rental fleet, the size of the rental fleet will be at year end and what CapEx for the full year will be?

And then if you might take -- give us a range of what you think CapEx could be for next year that would be helpful.

Well, I'd said previously we were thinking, anticipating CapEx this year to be in the $25 million to $30 million range.

And that's about what we're tracking.

So we'll stay in that range right there.

And that would equate to roughly an addition of 150 to 200 compressors.

Now, this rental fleet sale kind of skews those numbers, as I went through a while ago.

So if we, for example, build and add 150, it's going to net out to be about 100, because there's approximately 50 sold in that deal.

Now, as far as 2013, my gosh, you're asking me to look beyond lunch today.

Yes, that's -- I mean, we think the market's going to be a little stronger, certainly from the gas side.

Oil has shown a little deterioration here.

But I tend to think that's not going to get too bad.

So this is a fully undeveloped thought, because we don't -- that's pretty far to project.

But I would guess that we'd probably be in the same range as this year [for] maybe a CapEx and a rental fleet addition.

Although, yes, we'll net more next year because hopefully we don't sell any like we had to this year.

Right.

Great.

Thanks.

Gary Farber from CL King.

Can you just discuss how much of the fleet is exposed to where you stand as far as the liquids business?

We've got about 20%, 22%, 23% of the fleet in liquids now.

And I mentioned in the past I think we -- end of '11, we were at 20%, end of '10, we were at 10%, and I think I mentioned in the past we thought that we wouldn't be going up 10% each year, but probably mitigated somewhat.

So I think we're probably about halfway of where I thought we would be, and, coincidently, halfway through the year, probably I would guess ending up the year in the 25% range, roughly.

And then maybe just overall, how do you view the pricing environment currently?

From our product or commodity price?

Your product.

Well, it seems to be kind of benign a little, I guess.

Every once in a while -- it's kind of like Whack-a-Mole sometimes, every once in a while you see something pop up over on the horizon somewhere on a deal you just can't believe it was priced that way.

And everybody's got reasons for pricing stuff differently.

Our pricing has held steady through the year.

We're up about 5% over last year.

We see, as I mentioned before, all the stuff we're billing now is going at a premium 2008 level pricing.

So we think pricing is okay.

It's not -- we still are going to -- we still want to and try to push it, because we really haven't had an overall increase in too long.

And the price we're getting now is kind of incrementally driven as equipment goes out.

So it takes it a little longer to get the full effect.

We're getting there, it's just taking a little longer.

So, yes, right now, everything seems to be a little steady.

Again, that seems -- right when I said it, it seems to change somewhat in some areas.

But, yes, we're happy with where our price is going and we're able to push it adequately.

Right.

And then just one last one.

On the cash balance, you'd expect it to go higher by year end?

No, I imagine they'll price kind of level right at -- we've added a lot this first half, primarily from that rental equipment sale.

So I think with the capital anticipated the rest of the year and the cash generated, we'll end up within 5% or 10% of where we are.

Great.

Okay.

Thanks.

(Operator Instructions) Jeff Spittel from Global Hunter Securities.

Maybe touching on pricing again.

I guess it's been kind of tracking in the single digits on a year-over-year basis in terms of incremental pricing in the rental fleet.

Is that kind of a reasonable expectation, do you think, for the second half of the year?

Yes.

I don't think we'll get much more than that, because, like I said, there's not -- the market's -- I mean, we're growing and a lot of our competitors aren't growing.

But the market's still not strong enough to take just an overall blanket increase, because there's just still too much equipment sitting idle out there.

So we're having to, like I mentioned, we're having to incrementally go up in areas and on equipment we can, and it just takes a little longer.

Okay.

And any areas in the liquid space in particular?

I know you mentioned you started off in the Barnett combo, Granite Wash, Utica, Niobrara.

You've seen a little bit more of an influx competitively from some of the other guys in those basins or you think you're still pretty well out in front?

Well, I think we're -- it probably depends on the area.

I think the Barnett combo, we're a leading provider.

I think Utica, same thing.

Niobrara, we're just getting started in there, so we're probably just a little behind, but not much.

But that's coming on pretty quick for us.

That actually looks like a pretty good area.

So I think we're either leading or will lead within the next 6 to 12 months in those areas.

Sounds good.

Thanks, Steve.

I'll turn it back.

Joe Gibney from Capital One.

How about Eagle Ford?

Just following up on Jeff's question about liquids [directed] growth, Utica, Granite Wash, Niobrara, for now Barnett combo's been good.

Anything going on in the Eagle Ford?

Any traction there?

I know it's sort of early days, but I'm just curious to get your perspective.

Yes, it's -- probably 18 months ago, we [felt] that was going to be one of the quicker growers, and it really hadn't for us.

Yes, we're spotty in there, and there's a couple reasons for it.

Number one is, a lot of the stuff going in there is bigger horsepower right now.

So people are going more central stations, bigger horsepower, and that's typically initial phase to get into some of these plays.

So I think we're seeing that first.

And then, ultimately, our well head stuff will come along a little more, I think.

And also, we're pushing out just as much equipment as we can, actually, in our fab shops.

So between balancing between what sales business we have and the rental stuff, we're putting out just about as much as we can.

So we've chosen, actually, to maybe concentrate just a little more on these ones we've got a quicker uptake in and [steps] with some good customers and now have some critical mass and service capability there to go ahead and build those out a little quicker.

And, I mean, we're still -- we've got some people in the Eagle Ford and some equipment in there, but we think our immediate growth is going to be these other areas.

Okay, helpful.

On the make-ready overhaul, you had a bit of a blip in 2Q.

You indicated the same deal happened last year.

But as you look into 3Q, does that abate back down towards kind of 4Q, 1Q levels, more normalized levels in terms of -- at least in terms of what you're seeing right now?

Well, I think it will.

But again, that's kind of a -- it's not all bad.

I mean, you incur those --

Sort of high-class problem, right?

-- expenses in advance.

Yes.

But that revenue comes down the road.

So I don't want to hope for it to go down too much for the -- from the fact that that's equipment going out on rental.

So, but, yes, I think it will mitigate some.

I mean, it jumped quite a bit, 80% this quarter.

That's a pretty big quarter-to-quarter jump.

And that was an impact on the margins.

But I think it'll get back into -- I would anticipate it getting back into the, quote/unquote, normal range.

Okay.

And then last one for me, and I'll turn it back.

Just in terms of progression, your backlog now, I mean, you had sort of a noisy couple of quarters just working through the one-time sale.

So between $7 million to $8 million on your compressor sales backlog.

Kind of how do we think about that [flown] out in terms of revenue or at least in terms of the next couple quarters?

I think you asked that question last time and I answered it.

I probably shouldn't answer it this time.

These things always seem to slip.

But, yes, we just -- yes, it looks like probably right now is like a 40%, 40%, 20% over the next 3 quarters.

And throw in my disclaimer that just as has happened the last 2 or 3 quarters, this stuff is always slipping for some reason.

Typically, it's a customer delay from the point of add more equipment or change in spec or something like that.

But it's about as close as I can put it right now.

All right.

Good deal.

I appreciate it.

I'll turn it back.

(Operator Instructions) At this time, we have no further questions.

Okay.

Well, thanks, Erica.

And appreciate everybody joining me on this call and look forward to visiting with you again after the next quarter.

Good-bye.

This concludes today's conference call.

Thank you for attending.