Natural Gas Services Group Inc (NGS) 2013 Q2 法說會逐字稿

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

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

(Operator Instructions)

Your call leaders for today's call are Lindsay Naylor, IR coordinator, and Steve Taylor, Chairman, President, and CEO.

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

Thank you, Ross.

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 of 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.

Natural Gas Services Group 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, Lindsay, and thanks, Ross.

Good morning and thank everyone for joining me for Natural Gas Services Group's second-quarter 2013 earnings review.

I'm actually delivering this report on my way back from the Bakken Shale in North Dakota and Montana, where we were visiting customers and reviewing some of our plans for the area.

We have a good quarter to report on and we think the balance of the year will continue to be active and growing.

Although I will discuss more in detail, rental demand remains strong and gross margins across all business lines were higher this quarter.

Our compressor sales revenues continue to exhibit a high degree of variability and have declined on a comparative basis, but that's due to a large extraordinary sale of the last year's second quarter, a robust first quarter this year, and our stated intent to sacrifice sales fabrication for rental fabrication through the year.

We also had some sales revenues anticipated for the second quarter that were delayed until the third quarter.

I will go into details later on the call, but with that introduction let's move on to the numbers.

Looking at total revenue in year-over-year quarters, for the second quarter 2013 revenues decreased to $20.3 million and $24.5 million in the second quarter of 2012.

This decrease was primarily due to the large extraordinary sale of about $5.5 million we had of some rental equipment compared to the second quarter of last year.

Rental revenues, however, increased a little over $3 million or 22%.

For the sequential quarters of the first quarter of 2013 compared to the second quarter of this year, total revenues declined $3.7 million.

Rental revenue increased 5%, but as I mentioned in last quarter's call, our sales business had a better-than-anticipated first quarter due to some holdover 2012 sales and this reflects some of the decline we expected and announced.

Comparing the second quarter of 2013 to the second quarter of 2012 total gross margin, despite the revenue decline, increased 12% from $11 million to $12.3 million.

This was due to a greater contribution from our rental business and higher margins in all three primary areas of our business -- rentals, sales, and service and maintenance.

Sequentially, gross margin was essentially flat at $12.3 million but increased as a percent of revenue from 51% to 61% because of the higher relative contribution from rentals.

SG&A decreased a little over $300,000 in the year-over-year quarters, but increased a little less than $200,000 sequentially.

SG&A continues to run at 9% to 10% of revenue, although both year-to-date periods of 2012 and 2013 are in the 8% to 9% range.

For operating income and looking at the comparative year-over-year quarters, operating income reflects a 21% increase from $4.8 million in the second quarter of last year to $5.8 million in this current quarter.

We think this is pretty impressive considering the comparative revenue declines we saw.

Sequentially, operating income decreased approximately $300,000 and as a percent of revenue declined from 26% to 29% this quarter.

Besides revenue impact, operating income was affected by a small increase in SG&A and higher depreciation from additional fleet equipment.

In the comparative year-over-year second quarters, net income increased 28% from $3 million last year to $3.8 million this year.

Although our total top line was lower, a strong rental contribution, higher margins across the Company, and a lower net tax rate enabled us to deliver a higher net effect.

Without the lower tax rate, we would have still seen a net income increase year over year of 19%.

Net income was essentially flat between sequential quarters at $3.8 million for the same reasons just mentioned for the year-over-year quarters.

These first quarters of the year did exhibit net income in the 17% to 19% range of revenue.

EBITDA increased 18% from $8.7 million in the second quarter of 2012 to $10.2 million in the current quarter.

Sequentially, EBITDA in the second quarter of 2013 was $10.2 million, which was off $0.5 million compared to the first quarter of this year due to the lower quarterly revenue levels, but EBITDA did come in at 50% of revenue.

On a fully diluted of basis, EPS this quarter, earnings per share, was $0.31 per common share compared to $0.24 in the second quarter of last year and $0.32 last quarter.

Looking at sales revenues in the year-over-year quarters, total sales revenues decreased from $10.6 million in the second quarter of 2012 to $3.3 million in the second quarter of 2013.

About $5.5 million of that decline was the extraordinary sale of rental compression equipment last year, while the balance was an anticipated decline in compressor sales volumes.

Sequentially, total sales revenues, which includes compressors, flares, and parts, fell to $3.3 million this quarter from $7.8 million in the first quarter of this year.

This was coming off strong first-quarter sales results due to the shipment of some delayed 2012 equipment.

Gross margins did very well and increased from 38% to 52% in the sequential quarters, primarily due to a higher relative level of flare sales.

Looking at compressor sales alone, in the current quarter there were $650,000 with an extremely high gross margin of 41%.

This compares to compressor sales of a little over $5 million in the first quarter of 2013.

If you recall, I mentioned last quarter that we anticipated that the remaining three quarters of compressor sales this year would approximate $5 million, which would have been a little less than $2 million per quarter.

We had only $650,000 of sales in the second quarter this year, but an additional $1.5 million that we had projected for this quarter was delayed by the customer and has, in fact, shipped in July.

So this was delayed and not lost revenue and our backlog is still intact.

But as is often the case, we are realizing some of the sales in different months or quarters.

As mentioned, are compressor sales backlog at the end of the second quarter was approximately $5 million.

Rental revenue had a year-over-year increase of $3 million, or 22%, from $13.7 million in the second quarter of last year to $16.7 million for this current quarter.

We had very good gross margins this quarter with them running at 63% compared to 57% of revenue in last year's comparative quarter.

These better margins are attributable to a generally lower level of make-ready expenses on fleet equipment and the movement of higher price, new oil shale equipment to the field.

Sequentially, rental revenues grew almost 5% with an increase of over $700,000 to $16.7 million this quarter.

Margins exhibited sequential improvement from 57% to 63%.

We ended the second quarter with rental fleet unit utilization at 79% and horsepower utilization at 80%.

These numbers are identical to the first quarter, but we have continued to grow.

The utilization calculation can be misread in a quarter like this where we moved relatively more new apartment into the field than idle fleet units.

The growing utilization we've seen in the past two to three quarters has been primarily from our ability to redeploy used equipment due to some vapor recovery contracts we have won.

While we still place equipment like this monthly, we may not see large contract wins directed at idle equipment every quarter.

As we've seen in the past, this may cause some periodic flattening of utilization, but we will see continued redeployment and continued progress in growing our utilization of the existing fleet.

Fleet size at the end of June was 2,392 compressors.

This is a net addition of 65 compressors this quarter compared to 49 in the first quarter.

You can see that according to plan we've made some progress in ramping up our rental throughput.

Approximately 40% of our utilized fleet is now in oil shale and liquids plays.

This percentage has been steadily increasing since 2010, when we placed our initial unit on oil shale well.

We spent $10.7 million for capital expenditures in the second quarter compared to $7.7 million in the first quarter.

This is a total of $18.4 million for the first half of the year with 96% of this going from rental fleet additions.

I've noted in the past that we thought our capital expenditures this year would be in the $30 million to $35 million range.

With our growth and market penetration we now see this advancing to between $35 million and $40 million this year.

Going to the balance sheet, our total short-term and long-term debt was approximately $850,000 as of June 30, 2013, and cash in the bank was $29.3 million.

Our cash flow from operations for the first six months of this year was $19.4 million.

For my general comments, from a macro general perspective, we think that oil pricing stays in a narrow band through 2014 of approximately $90 to $100 a barrel and continues to encourage operators to stay active.

That, of course, will continue to drive our oil and liquids expansion and growth.

Gas-wise I am not predicting price anymore and I think the trend for 2014 will be set by this winter.

If we see relatively cool weather and the price heads back towards $4 per Mcf, I think we may be able to sustain itself -- price may be able to sustain itself through next year.

If winter is a non-event, I think we are back to the nominal $3.50, plus or minus, sort of pricing for another year.

I will make a couple comments about the Bakken shale since I was just up there.

Activity everyone hears about is true and it is widespread.

We traveled from Sydney/Plentywood, Montana, region over to the Williston/Tioga, North Dakota, area.

In that span of over 125 miles, which does not cover the full extent of the play, it is busy everywhere.

As in all the liquids plays, the commodity of choice is oil but there's always a fair amount of associated gas being produced.

The Bakken is no different except that it is further behind in gas infrastructure than most.

This is being remedied, but it does take time.

It is significant that Continental Oil, one of the largest, if not the largest, operators in the area recently announced that they are committed to eliminating flaring and other gas emissions totally within a short few years.

That means that gas will not be flared, but properly gathered and transported.

That takes compression and is good news for us.

We have set a modicum of equipment in the area and we think it will grow, albeit at a slower-than-normal pace.

The real growth here is for gas handling equipment will be in a couple years down the road, but we think positioning now is important.

That's the end of my prepared remarks.

Now I will turn the call back over to Ross for questions anyone might have.

(Operator Instructions) Jason Wangler, Wunderlich Securities.

Morning, Steve.

Just maybe following up on those last comments on the Bakken, could you give us maybe just an idea of how many units you have up there now and I guess just where you see that going in terms of the infrastructure coming in?

Is it you just start putting more and more up I guess as the equipment starts or the infrastructure starts getting in there?

Yes, I won't give the exact number just from a competitive standpoint, but let's say it's between zero and 50 up there right now.

So it's still a relatively small area for us, but as I mentioned, we think there is value in pre-positioning there somewhat.

As everybody knows, the gas infrastructure there is not as well developed.

There are gas pipelines going in.

Of course, the fact that we saw some gas plants being installed.

Then when you get announcements like Continental, I think it's going to be a pretty good area ultimately.

We do think it's a year or two down the road once everything gets in and going and some compression starts moving.

There's not a whole lot up there from anybody, us or any competitors.

I think it is going to be growing.

It's an area that is fairly insular from the point that it's so remote, so it's a hard working environment that you have to kind of get up there and be part of that community for a little bit.

And that's what we are in the midst of trying to do.

That's helpful.

Then just made sense obviously the CapEx bump.

How many compressors do you think you are targeting to add the second half of this year?

Well, if we -- we've got about $19 million.

We are about halfway.

If we go to $35 million to $40 million, if you just take $40 million as the number we've got little over -- a little less than half that spend and about 110 units.

So we will be in the $225 million, $250 million range by the end of the year, we think.

That's helpful.

Thanks, Steve.

Joe Gibney, Capital One.

Morning, Steve.

Just one quick question.

Just trying to understand a little bit the additional flow through progress on ramping up your throughput.

Is this just a function of shifting over to Tulsa a little more?

Is there some outsourced fab embedded in that lift?

Just trying to get a little better feel for the additional throughput.

No, it's mainly our own facilities and shifting more into Tulsa for them to take on more there.

We are still looking for some outside fabricators.

We still think we might be able to push it a little bit more if we had a little more capacity.

But we are first working on our internal requirements, so that's mainly opened up Tulsa.

As I mentioned in the call last time, that's why we have ramped down the sales revenue a bit for the year and that's what we are seeing right now.

Then it being taken -- its place being taken by the rental.

Helpful, I appreciate it.

We do anticipate or we are hoping that we can find some external fabrication.

It's just, number one, everybody is busy and, number two, quality issues are always foremost.

Okay, great.

That was all I had, Steve.

I appreciate it, thanks.

Peter Van Roden, Spitfire Capital.

Just one quick question.

How is the VRU deployment coming along right now?

We got a couple contracts towards the end of last year, first of this year.

We are still -- on one of those contracts we're still deploying equipment.

Of course, we are past the flush deployment on it but we are still putting stuff out.

And in fact, I think we are making a little more penetration into that customer than we originally anticipated.

The second contract is really just starting to ramp up, not a whole lot this year.

We will see more next year.

I think the final EPA rules on this, the VRU stuff for tank vapors, were issued the other day.

They did keep some of the VRU requirements for April 2014 but then moved some of the other VRU requirements back to April 2015.

So it's giving the industry about another year to implement some more VRUs, which is not a bad thing necessarily because the industry was pushing from the point that you just can't get that much equipment out in the field.

So I think it's going to be a little bit more of a manageable sort of thing.

We anticipate continuing to grow, certainly through this year and the next couple years, and then it's just going to be a steady stream after that.

Okay.

Then one follow-up.

How has -- I know [Extern] came out a couple days ago and said that they saw a lot of equipment come out of dry gas plays this past quarter.

How has your business been there?

We have pretty well held our own there.

You can look at our dry gas volume and number of compressors and it's really been pretty steady the last three to four years.

It just hadn't varied 5% probably.

In fact, we've seen maybe just a little -- and cautious about saying this because I said it last time and everybody thought dry gas was back.

But we have seen a little movement into dry gas in a couple areas.

This is not by any stretch a trend or anything to really get too excited about, but I think just continues along with a trend we've seen where we are able to really pretty well hold in the dry gas and then the growth coming from the liquids plays.

Okay, sounds good.

Thanks very much.

(Operator Instructions) Craig Hoagland, Anderson Hoagland.

What do you consider the useful life of the new units you are building for the fleet now?

They are like all of our other units.

They are book depreciated on 15 years, but we expect them to be a 20-year piece of equipment.

It's all heavy-duty oilfield stuff, good engines, good compressors.

We design and build the stuff ourselves so we know exactly what goes into them.

And of course, we maintain it ourselves.

So really if you look at a unit -- and we don't have any that are 15 years old.

We haven't even depreciated any fully yet, but say you take a look at a 10-year-old unit it may have a couple coats of paint on the outside and it looks like it's been at the oilfield for 10 years.

But you have to remember about every 2.5 to 3 years that equipment goes through an overhaul.

So all the internal running gears they are pretty new.

That's the important part, that's what keeps the equipment in good shape and running, so we don't have any concerns about it lasting a good couple decades.

So they are just perpetually renewed basically?

Yes, yes, it's just -- we do preventive maintenance inspections every couple months on them.

Of course we are out there all the time if there's any mechanical problem.

Again, these are our guys, so we know exactly what's going on with the equipment.

It's just a process of rebuild.

After you get the new stuff out there about every three years you start going on a rebuild schedule.

Okay, thanks.

(Operator Instructions) [Ian Bruce], [Private Capital].

Steve, quick question for you.

On the addition side, on adding units, it looks like you added about 65 and I think you're still looking at adding outside fabrication.

Is there a number you have in mind in terms of what would kind of satisfy the growth that you are seeing out there in terms of how much you could conceivably add to your fleet every quarter or every year?

You mean if we brought in some outside fabrication?

Yes, yes.

In other words, are you leaving a lot out there on the table by producing 50 to 60 units a quarter as opposed to maybe 75 to 100?

I wouldn't say we are leaving a lot.

There's certainly some jobs that we miss because we can't get equipment out quick enough.

That's pretty frustrating to us all and that's why we are trying to ramp this stuff up, but it's not a whole lot.

And a lot of these customers that we work with are good long-term customers and we are tending to wait on us.

We've got -- and we don't really quote a rental backlog per se, but our fabrication schedule up through about November is pretty well committed on the rental side.

So all the stuff we are building next quarter is pretty well already spoken for.

So you get the issue of any other customer coming in or maybe an existing customer wanting to add some more equipment having to put them at the end of that line, and that's where we are trying to get this incremental or layered on fabrication to take care of some of that stuff.

So we are not missing -- of course, we miss some.

You can't -- I don't know if you ever want to catch it all because certainly with the balancers it enables us to keep our pricing a little higher.

We are not missing a whole lot and we are, as I mentioned, ramping up internally.

Then looking for some good external providers, too.

All right, thanks.

At this time we have no further questions.

Okay.

Thanks, Ross.

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

I appreciate your time this morning and look forward to visiting with you again next quarter.

Thank you.

This concludes today's conference call.

Thank you for attending.