Natural Gas Services Group Inc (NGS) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group as it announces its audit committee conference call.

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

(Operator Instructions).

Your call leader for today's call are Lindsay Naylor, IR Coordinator; Steve Taylor, Chairman, President, and CEO.

I will now hand the call over to Ms. Naylor.

Ms. Naylor, you may begin.

Thank you, Erika, 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 forward periods to differ materially from forecasted results.

Those risks include, among other things, the loss of market shares through competition or otherwise; the introduction of competing technologies by other companies; and new governmental safety, health, and 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, Lindsay, and thanks, Erika, and good morning and welcome to Natural Gas Services Group's full-year and fourth-quarter 2012 earnings review.

We had an excellent year and an especially strong fourth quarter, and I'm happy to report that the year was a record setter in a few ways.

I'll touch on those points as we go through the numbers, but suffice it to say that we are optimistic going forward and anticipate additional growth into 2013.

From a total revenue standpoint, 2012 full-year revenues increased 44% to $93.7 million, up from $65.2 million in 2011.

This was a record level of revenue for NGS.

For the sequential quarters of the fourth quarter of 2012 compared to the third quarter of 2012, total revenues increased $4.3 million or 22%, primarily due to a surge of compressor and flare sales orders delivered in the fourth quarter.

In the year-over-year comparative fourth quarters, total revenues increased 26% to $23.5 million.

Comparing the full years of 2011 to 2012, total gross margin increased $9.1 million, or 26%, to $43.8 million.

Gross margin percentage decreased from 53% to 47%, and this is due to a mix shift from predominantly higher margin compressor rentals and flare sales in 2011 to a stronger blend of compressor sales in 2012.

In the sequential quarters of Q3 and Q4 of 2012, gross margin increased 12.3% to $11.4 million, while the year-over-year comparative fourth quarters grew 16%.

SG&A increased about $2 million in the full year of 2012 compared to 2011.

However, as a percentage of revenue, it moved from 9% down to 8% in the same annual periods.

In the sequential quarters, SG&A was down 9%, increased less than $300,000 in the comparative year-over-year fourth quarters.

We expect our SG&A to typically run in the 9% to 10% range.

Again, comparing the full years of 2011 and 2012, operating income increased 36% from $14.9 million to $20.3 million.

In sequential quarters, operating income was up 30%, while the year-over-year fourth quarters reflect an 18% increase.

Net income in 2012 was $12.7 million, which was a 30% increase from the $9.8 million earned in 2011.

In sequential quarters of the third quarter of 2012 to the fourth quarter of 2012, net income increased almost 37% to $3.6 million where the comparative fourth quarters of the respective years grew by 18%.

EBITDA increased 21% from $29.7 million in 2011 to $35.9 million in 2012, also a record high, and historically a 57% increase in the two year since 2010.

Looking at the fourth quarter of 2012 compared to the third quarter of that year, EBITDA was up 17% to $9.6 million.

EBITDA grew 18% from the fourth quarter of 2011 to the same quarter in 2012.

We have consistently seen EBITDA running in the 40% plus or minus of revenue range.

On a fully-diluted basis, earnings per share for the fourth quarter of 2012 was $0.29 per common share with a full-year finishing at $1.03.

Looking at sales revenues, for the full-year comparison of 2011 versus 2012, total sales revenue, which includes compressors, flares, and parts increased 136% from $15 million in 2011 to $36 million in 2012.

We saw an appreciable shift towards our sales business over the year, and it was mainly driven by compressor sales.

Not only did we have a large sale of rental equipment at the beginning of 2012 that contributed, but custom fabricated compressors also exhibited strong growth.

Another area of our sales that has grown is our engineered flare and burner systems.

Revenues this year are 14% higher than last year at $6.9 million.

This doesn't sound like a lot of growth, but this was a $2.4 million business in 2009.

So it has almost tripled over the past three years.

Plus, gross margins run north of 60%.

Total sales revenues increased 69% or $3.4 million sequentially and $3.5 million or 73% in the year-over-year quarters.

Looking at compressor sales alone, we saw an increase of almost $21.5 million from $4.8 million up to $26.2 million in 2012.

Approximately half of that increase was the extraordinary sales from rental compression, but we still demonstrated good growth in our base compressor sale business.

As mentioned at the beginning of the call, we had a surge in our compressor sales in the fourth quarter of 2012 compared to the prior and year-earlier quarters.

This was primarily due to numerous customer-caused changes and delays, while billing a large compressor order for a major customer.

Although we were receiving cash progress payments while the work was in process, we couldn't recognize the revenue until title to the equipment was transferred to the customer at delivery.

This revenues surge simply reflects that delivery and recognition, but also demonstrates, once again, the inherent lumpiness in this part of our business.

Gross margins for compressor sales increased from 16% to 19% between 2011 and 2012.

Our compressor sales backlog at the end of the year was approximately $6 million, which is where it has been running all through the past year.

Compressor and rental revenue had a full-year increase of $7.9 million, or 16%, from $48.6 million in 2011 to $56.5 million for this current year.

This growth rate is a bit understated because of the rental revenue that was lost with the sale of some rental equipment earlier in 2012.

Without that sale, rental revenues would have approached a 19% growth rate.

In spite of that, revenue rental revenues were at a record level.

In sequential third and fourth quarters of 2012, rental revenues were up 6%, the largest quarterly increase during the year, and they increased 11% when comparing the fourth quarter of 2012 to the same 2011 quarter.

Gross margins increased from 57% to 58% of revenue between 2011 and 2012.

We ended the year with a rental fleet utilization at 77% and horse power utilization at 79%.

This compares to unit utilization of 74% at the beginning of the year.

While a 300 basis point increase may seem minimal, we have to remember that this was on top of rental fleet growth of 8% to 9%.

Fleet size at the end of the year was 2279.

This is a net addition of 159 compressors year-to-date where we actually built and set 208 units this year when you account for the rental equipment sale.

Approximately 35% of our rental fleet is not employed into oil shale or liquids-oriented plays.

This is up from zero exposure at the beginning of 2010.

We built a total of 43 compressors in the fourth quarter, and rental fleet growth capital expense was $30.9 million for all 208 units built in 2012.

And I'll remind everyone, we implemented an average -- we implemented a price increase for all rental compressors, new or used, deployed after October 1, 2012.

Our average rental rates across the fleet calculate to be relatively flat over the past year.

That has been skewed by the rental compressor sale I've mentioned.

However, our pricing process progress is evident in the following fleet numbers for 2012.

Net fleet unit growth was up 7.5%, and net fleet horse power growth was up 8.2%.

Utilized fleet growth was 11.5% higher, while utilized horsepower growth was a gain of 11.4%.

Now against all that, rental revenues were up 16%, greater than any indicator of fleet growth, thereby showing an average per unit and per horsepower price gain.

Further, if we look at the average rental rates on newly-contracted units, we are seeing rents running 7.1% higher in all of 2012 with 4.9%, the majority, of that coming in in the fourth quarter of 2012 after our price increase.

This all confirms that our price increase is taking effect.

Going to the balance sheet, our cash position net of debt was approximately $27.2 million as of December 31, 2012.

Our debt is less than $1 million, is classified as long-term, and cash flow from operations for the year was $35.4 million.

Now generally for 2013, we think our rental activity will continue at the same pace in essentially the same plays and that we are well positioned to take advantage of that growth.

Our Permian Basin and Niobrara shale and Granite Wash business looks like it will grow this year.

We are looking for heightened activity from the Utica and Barnett combo that have slowed a bit last year.

We are even expecting some added activity from the Marcellus.

Equipment requirements will continue along the same path we have seen with gas lift-type compressors being the predominant type of equipment needed with an increasing appetite for vapor recovery units, referred to as VRUs.

Gas lifting compressors are usually high pressure units used for gas recirculation/improved recovery in oil or liquids-laden wells with VRUs being required for low pressure, low volume applications for small gas premium recovery.

Some small gas premium gathering is economic, but more and more of it is environmentally driven.

I mentioned in our last call that we were successful in securing a VRU supply contract in the fourth quarter of 2012, and we continue to see opportunities in this arena.

As noted, our custom fabricated sales business had a very good year, and we hope that continues.

But we still do not have enough of a backlog to predict that activity too far into the future, and as just described, this business remains the hardest to predict.

We think our business looks positive over the year and that commodity prices will generally hold on the oil side and potentially increase gas-wise.

EIA predicts that Brent crude will average $108 a barrel this year in 2013 and $101 in 2014.

And that would increase -- with the increased pipeline capacity, the WTI differential will shrink.

If that is so, the realized price of some US areas will actually increase this year or next.

While we participate in what can be termed as a derivative oil market, that is associated gas, increased oil price and shale activity is what has driven our business for three years now.

From a natural gas perspective, I'm even more bullish, even though I can't get a handle on when the long-term trends become current.

I used to predict when I thought natural gas would turn up.

Now I started referencing the never-identifiable, always-mysterious consensus opinion, and now I just base my views on when the next cold winter hits.

When it does happen, I think natural gas could really get busy again.

I think we are approaching the long-awaited supply/demand balance and that demand will take off much quicker than the supply will be available.

EIA notes that natural gas supply has grown 7% or 4% year over year the last couple of years.

That will be essentially flat in 2013 in 2014.

This is a large anticipated decrease, and I think it could result in higher pricing activity with any increase in demand.

EIA average natural gas price in 2012 was $2.75 per Mcf, and they predict it will be $3.41 this year and $3.63 in 2014.

That is a 24% average price increase this year and an added 6% next year.

I don't know about you, but a 24% price increase in one year sounds like some tightening is predicted.

I dare say if we have a good winter in 2013 and 2014, natural gas will see $4-plus price levels.

If that happens, you will see a level of activity from oil and gas shales simultaneously that may be hard to keep up with.

Are these predictions or guarantees?

Absolutely not, but I think the probability is in our favor.

We are encouraged by what we see and hear in the market and from our customers anticipate another growth year for NGS.

Now I know some of you may have dialed in to listen for any political comments I might have, even though I tentatively swore off that on the last call, except for especially egregious situations.

Although the regulatory tax and general industry tax continue and politicians continue to try and amend economic principles or repeal physical ones, in the end, free markets triumph, much to the chagrin of some, and because of that and the resourcefulness of our industry, I am generally optimistic.

Erika, that is the end of my prepared remarks, and I will turn it back to you for questions anyone might have.

(Operator Instructions).

Jeff Spittel, Global Hunter Securities.

Maybe if we could start off, it sounds like you are pretty comfortable with -- from a strategic standpoint this year.

If we rank order the priorities, it sounds like concentrating on growing the market penetration in those oil plays where you already have a footprint represents the most attractive opportunity rather than trying to move into some of these nascent plays where maybe things aren't ramped up quite as much.

Is that a fair statement?

Yes, generally, that's what we're going to do, Jeff.

The past couple of years we moved into three or four new areas, and they've had a pretty good ramp up in activity, but there's still more coming, we think.

And so, yes, it's going to be pretty easy just to grow that and start putting more people and more equipment into those existing operations.

Now, that doesn't eliminate any other movement into new geographies, and there's one or two that we are keeping our eye on.

But we're probably not going to go into some of the brand, brand-new ones.

The advantage we've got, if you look at these plays, especially here in the Permian, there's just so much activity predicted that there is going to be plenty to do just where we are, even if we don't move anywhere else for the next year or two.

Sure, sure.

That makes sense.

And then switching over to the VRU business, is this mostly driven by the majors trying to get in a compliance ahead of time from an environmental standpoint, and how much longer do you think it takes for some of the smaller and mid-cap operators to start paying a little bit more attention to this as they look forward into 2015?

It is primarily driven by the majors right now because they are doing this stuff as they are putting wells in as we go, even though it's not technically required yet.

They just got the resources and the wherewithal to do it as they go right now.

That will, as we get closer to full implementation, that will shift to everyone, and it will be interesting to see how that moves as we get into full implementation and full application of the rules.

But it's not unusual, not going to be a surprise that there's going to be a rush at the end to try to get people in compliance that aren't.

Sure, sure.

It makes sense.

All right.

That is two for me.

Congrats on another great quarter, Steve.

Appreciate it.

Okay.

Thanks, Jeff.

Jon Braatz, Kansas City Capital.

You saw a lot of compressor sales this past year, especially in the first half.

And you spoke them being one-off, but is there any change in the market dynamics that would suggest that sales might continue to be -- you might see more one-off sales that might be a little bit stronger than you anticipated?

Well, if I'm -- in terming you right, the one-off or what we call extraordinary, was a sale of some installed rental equipment that a large customer had requested we sell to them.

And that is typically not something we've done very much at all in the past.

So it came up.

It was a good deal on both sides, and we did it.

So that is the one-off I referred to.

And it is around -- approaching about $11 million of the sales last year.

Yes.

So those are hard to, impossible to predict because just the last one we did was in 2006, and they just come up sometimes.

If they come up, we just address them as the tract salesmen presents themselves.

But for the general level of compressor sales, our backlog has been running consistently in this plus or minus $6 million range for the last four or five quarters.

That is what it is at now.

That is what I kind of anticipated running at.

So there seems to be the level it will hang in there at.

If we do get any of these other type of sales that come again, that will just be gravy or icing on top of that, but nothing that we consider really repeatable.

Okay.

Secondly, I think you have about $28 million in cash on the balance sheet, and presumably you could generate another I do know, $10 million to $15 million in free cash flow potentially next year.

And so would you be up to maybe, I think, over $3 a share in cash.

What's your thoughts on how you would use that cash rather than having it sit idle on your balance sheet?

What might be your intentions?

Well, first, we probably won't -- the past couple of years free cash has essentially been negligible because we've spent just about all of it on fleet growth, and I anticipate that being about the same situation this year.

I don't think there's really been much of a net add last year or this year to that balance, and I don't think there would be much this year.

So that addresses that, but still --.

Well, you added -- Steve, you added -- your cash balances went up about $15 million this year.

No, I think it is about the same.

Well, I have at year-end last year, $16 million in cash.

Well, okay, yes, that's right.

I was thinking of something else.

Yes, well -- this year it balanced out.

We think it will be the same, in '12, and we think it will be the same in 2013.

Our intention with that is not to hoard cash or just keep it on the balance sheet.

We are going to watch the market here for 12, 18 months.

If it -- based on what we saw in 2012 and what we're seeing in 2013, we think, like I say, it will be a little neutral there.

If this market picks up more than what we anticipate -- and there's a chance it could, we can start whittling into that a little quicker.

Now if we get, say, 18 months down the road, 24 months down the road, the market is doing about what we predicted, and either the cash is the same or maybe we've added to it.

I think at that time we need to start looking at whether these markets can -- the markets will grow like this -- this cash is sitting there -- we need to do something from the shareholder standpoint then.

Okay.

Do you need any additional physical capacity to meet the demands of this market?

We are looking at that a bit, and we haven't made a decision on it.

We've got two fabricating plants, one in Tulsa, one in Midland.

What we have been able to do to this point is shift back and forth, Tulsa primarily being the place we build the sales units and Midland being the rental fab.

So we've been able to shift back and forth and address what we need to, but we are looking at that from the point that if we've built about 200 units a year the last couple of years, if that does get up to 250 or more, we'd have to do something else.

And we're starting to put contingency plans together to address that if that does do that.

And of course, that's, again, where the cash would be used from that standpoint also.

All right, Steve.

Thank you very much.

Okay.

Thanks.

Matt Beeby, Williams Financial.

I wanted to follow up on the VRU work, a nice win at the end of the year last year.

Can you talk about how you are pursuing more of those type of larger agreements and the impact on your idle fleet that is in the yard now, maybe talk about reactivations over the quarter and then maybe how many units are left and how the trend of work is either coming to you or you are pursuing more of that?

Maybe you can address some of those questions on the VRU side.

Yes, as I mentioned last quarter, this is a new phenomenon where people are just going out and bidding for VRUs.

And there's not -- it's not like everybody is out there doing it.

There's not a real big movement.

Yes, I think there will be more and more as we get more of this implementation going on, but it's kind of a new phenomenon.

But I expect it to grow.

So just in our typical sales prospect and identification that would run along those.

And some of this stuff is with existing customers, so maybe we're doing some gas lift for them or some just regular gas sales compression for them, and it's a natural thing that they'd look at us for VRU-type equipment also.

So that is how we are identifying some of it.

We are able to in some situations with our flares, that is an environmentally-focused sort of product also from the point of not venting and flaring.

So there's some tie-in you're starting to see that people are trying to put together on some of that stuff.

So we're trying to tie this stuff together where we can and then where we can't.

Just from the pressure side, we've certainly got that capability.

It is helping our utilization and certainly from the point of being a very profitable utilization that for the last two or three years since the downturn, the majority of our equipment idle in the yards has been the smaller horsepower, smaller gas compressor size, which now fits a lot of these VRU applications.

So, for example, that award we got last year, we've already moved probably 40 or 50 units straight out of the yard, didn't have to build a thing, and out into operations.

And that particular contract looked like it is going to be pretty busy this year.

So we're seeing movement in that from the VRU standpoint that is really going to help incremental utilization and incremental margins with no incremental capital.

Great.

And then does that contract, is that last used at a multi-year type of an agreement, or maybe it's not completely defined, but maybe talk about the length of that, the expectation there -- bigger picture?

Well, it's an -- I won't go into the details of it too much.

I know you're not going to ask for that, but I'll say it -- it's a medium-term contract and will evergreen after that.

And, of course, any contracts whether it's compression or whatever it is is always at the pleasure of the customer.

So, as long as you are doing a good job and performing out there, you get to stay.

The contract just gives you a little preparation and gives some advanced notice on what might be required.

But it is medium-term, say, a one- to two-year with evergreen provisions in there, and we don't expect anything other than being out there for the duration.

Got you.

If I can get one more in on the sales side, you talked about, I think, $6 million in backlog.

Any guidance that you could offer on what that looks like in the next quarter or two and maybe a baseline for your build capacity is and how that translates into revenues?

Well, and again, the reason I hesitate on the sales side is because I hesitate on the sales side.

It's just always very, very nerve-racking to me to give any sort of indication on that because we don't get a whole lot.

Just like that example I gave -- we had this equipment sitting around for two or three quarters and finally got to recognize it.

Generally just historically, we've been running in that $6 million range.

I think that will probably continue.

It can be lumpy.

It has been lumpy quarter to quarter.

It could be $3 million in one and $7 million in another one.

Again, it depends on the order flow, number one, and just when we could recognize some of these revenues, number two, especially on some of these larger jobs.

So we're just kind of getting an anticipation that the backlog would be expected to continue at about the same level throughout this year, but again, just still very, very sketchy.

With only that much backlog compared to back up through 2008 where we had 3 to 4 times that, it's hard to get more than a quarter or two of confidence for some of that.

Got you.

Thanks, Steve.

Thanks, Matt.

(Operator Instructions).

Steve, at this time, I have no further questions.

Okay.

Great.

Erika, I appreciate it.

I tell you what.

I want to thank all of our employees for all their efforts this past year.

It's really the success of the business and the results I get to report are strictly they're doing.

So I want to really express our appreciation on that, and we look forward to visiting with everybody again next quarter.

Thank you.

This concludes today's conference call.

Thank you for attending.