Natural Gas Services Group Inc (NGS) 2014 Q1 法說會逐字稿

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

(Operator Instructions)

Your call leaders for today's call are Alicia Dada, IR Coordinator; Steve Taylor, Chairman, President and CEO.

I will now turn the call over to your moderator.

Ms. Dada, 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 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; 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 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.

Thank you, Alicia, and thank you, Erica.

And good morning and welcome to Natural Gas Services Group's first-quarter 2014 earnings review.

I'll start our review by noting a couple highlights that were released on April 25.

Compression sales revenues this quarter ran in the range we anticipated, but the year-ago and sequential-quarter comparisons will be off due to a higher level of sales in past quarters.

This is not unusual since sales, and especially compressor sales, are historically variable on a quarterly basis, but it can cause fluctuating comparisons.

However, we have seen an appreciable buildup of our backlog this quarter, and that sets us up well as we go through the year.

In our rental business, quarterly growth was lower than we have experienced recently, but we think it is an anomaly and our growth rate should be back on track going through the year.

In spite of this, this period is our 18th straight quarter of rental revenue growth.

I will detail these as we go through the narrative.

Now let's move on to the numbers.

Looking at total revenue and in the year-over-year quarters, the first quarter of 2014 revenues decreased $1.7 million to $22.3 million from $24 million in the first quarter of 2013, with the decline attributable to varying sales revenues.

The sequential quarters of the fourth quarter of 2013 compared to the first quarter of 2014, total revenues were off $800,000, again due to fluctuating sales volumes.

It depends on the quarter, but our sales volume changes are primarily driven by compression in flare sales.

As we will discuss further, compressor sales, although variable, generally look to be trending up, while flare sales, a relatively small part of the business, are trending down.

My comments in the past noted that we have anticipated this with a positive aspect be that if you are not flaring gas, you are likely compressing it.

Total gross margins, comparing this current quarter to the first quarter of 2013, gross margin was down 2% from $12.2 million to $12 million, while the overall gross margin ratio increased from 51% to 54% of revenue.

Sequentially, gross margin increased 1% to $12 million, again, a strong 54% of revenue.

SG&A increased to 12% of total revenue, primarily due to our lower total revenue base, and the award of employee stock and options in this quarter.

This is a double-edged sword because, while we distribute these each year, the significant appreciation in our stock price over the past year has driven this non-cash expense higher.

We do, however, anticipate this coming back into a normal range.

Looking at operating income in the comparative year-over-year quarters, they reflect a decrease from $6.1 million in the first quarter of 2013 to $4.4 million this current quarter.

Sequentially, operating income was off $600,000 to $4.4 million, but remained in the 20% to 21% of revenue range.

In the comparative year-over-year first quarters, net income decreased from $4 million last year to $2.9 million this year.

Comparing the fourth-quarter 2013 to the first-quarter 2014, net income was off $300,000 to $2.9 million, but holding steady at 13% to 14% of revenue.

EBITDA was $10.7 million in the first-quarter 2013 and $9.4 million in the current quarter, a range of 42% to 45% of revenue.

Sequentially, EBITDA was off $0.5 million to $9.4 million when compared to the fourth quarter of 2013.

On a fully diluted basis, earnings per share this quarter was $0.23 per common share.

Looking to sales revenues, in the year-over-year quarters, total sales revenues, which include compressors, flares, and aftermarket activities, fell from $7.8 million in the first-quarter 2013 to $3.3 million in the first quarter of 2014.

For the sequential quarters, total sales revenues fell $1.1 million in the fourth quarter of 2013 to $3.3 million in this current quarter, with approximately two-thirds of the decline from flare sales.

Reviewing compressors sales alone, in the current quarter they were $2.2 million.

This compared to $5.2 million in the first-quarter 2013; but margins have been very strong in all comparative quarters and are running at 28% to 30% of revenue.

Sequentially, compressor sales were down $350,000 when compared to last quarter.

Our compressor sales backlog at the end of the fourth quarter 2013 was $3 million, but it has grown substantially to $10 million at the end of the first quarter of 2014.

We anticipate compressor sales in the second quarter this year at about the same level as this first quarter, with the majority of the backlog occurring during the second half of the here.

The backlog is presently split roughly one-half international and one-half domestic oil shale.

Fluctuating sales revenues and resulting comparisons are a fact of the business and have been our historical experience.

But we have been able to fill the backlog well this quarter.

Rental revenue had a year-over-year increase of $2.8 million or 17%, from $16 million in the first quarter of 2013 to $18.8 million for this current quarter.

Gross margins were 58% of revenue this quarter, compared to 57% in last year's comparative quarter.

Sequentially, rental revenues grew 1% to 2% from $18.5 million to $18.8 million, but we did have a good move in gross margins with an increase from 54% in the fourth quarter to 58% this quarter.

This lower rate of quarterly growth was anomalous when compared to the record number of new rental contracts we started in the first quarter.

In fact, and I want to emphasize this, we set more compressors on new rental contracts in the first quarter of 2014 than we have in any quarter over the past three years with, as has been the case in the past, most of those going into oil shale and liquids-oriented basins.

This quote-unquote top-line growth is encouraging, in that we are still seeing expansion in that part of our business.

Additionally, the number of net rental contracts placed in April, just this last month, places it as one of our top three most-active months for net contract growth over the past three years.

The impact to our quarterly net growth was a surprisingly high rate of contract terminations in the quarter, with the majority of those being equipment out of our dry gas areas.

There were various reasons in different customers that sent equipment home.

And while there doesn't seem to be any discernible trend to it, the reasoning appears to revolve around a combination of lower gas volumes and expected prices going into summer.

Although we work hard to project the number of new units and contracts we anticipate in the future, unfortunately due to the short 30-day notice period required to return equipment, there is scant visibility on contract terminations.

I have mentioned in the past the majority of the oil shale units we are building and renting are going into gas lift service, which is a method to enhance and increase oil production with the use of gas compression.

There was a recent study that notes an appreciable increase in the use of gas lift on an absolute and percentage increase basis, and seems to correlate with the growth we have seen.

This kind of external data and the growth we have seen in our oil shale business leads us to believe that our growth expectations for our rental business are still valid; and our previously announced fabrication expansion continues on schedule.

Fleet size at the end of March 2014 was 2,643 compressors, and we ended the first quarter with rental fleet utilization of 79%.

This was a net addition of 87 compressors for this quarter on a capital spend of $13.3 million per rental fleet compression expansion.

Between 40% to 45% of our active fleet is now deployed in oil shales and liquids-oriented plays.

Going to the balance sheet, our total debt, short-term and long-term, was approximately $500,000 as of March 31, 2014, and cash in the bank was about $21 million.

Our cash flow from operations through the first three months of this year was $9.6 million.

From a macro perspective, although we saw some downward movement in our dry gas markets, there may be a potential for more upside activity in the future.

We did not actually expect any real uplift these past months due to price spikes or storage levels; but the rest of the year will be interesting.

As you know, we do not predict natural gas prices or activity anymore since the non-winter of 2011/2012.

But storage levels are now down to record low levels; and depending on summer weather, which will impact rates of storage injection, we could conceivably see a stronger gas market going into the 2014/2015 winter, the end of this year.

There is more and more speculation about what oil and gas prices may do in the next year or two.

But taken as a whole, we tend to think that the commodity price environment will be neutral, meaning no significant changes from where we are, to positive.

In any event, we are confident that no matter the environment, NGS will continue to execute as required.

This quarter certainly had some countervailing winds.

But going forward, our sales backlog is the highest it has been for a while, and top-line rental growth continues to be vigorous.

Overall trends look to be positive, and we expect a growing, successful year.

That is the end of my prepared remarks and I will turn the call back to Erica for questions anyone might have.

(Operator Instructions) Rob Brown, Lake Street Capital.

On the dry gas market, that showed some weakness in Q1, what have you seen thus far in April?

And what are the current trends in that market?

Well, April is looking good.

I think it's -- I'd just say, it looked to be an aberration or anomaly of some sort; and we really haven't seen anything going on April-wise that's out of the ordinary.

If you looked at Q1, January we had more dry gas; it is coming back.

February it settled down; March picked back up.

So it's -- now April is back down; now hopefully it doesn't pick back up.

But I think once we have gotten out of the end of the winter and now we are starting to go into the solar season, I am anticipating it being level.

But so far in April we haven't seen a repeat.

Great.

Second question on your SG&A costs.

I think you talked about them spiking up a little on option-related stuff.

What is the run rate that you expect SG&A cost to be at the rest of the year?

Well, we think it will trend back down to -- we typically run in the 9% to 10% range.

So just roughly -- and of course, this stuff will vary -- I think we can see maybe a 0.75% to 1% reduction for each quarter.

So we'll be back by the second half, back to our normal 9% to 10% of revenue rate.

Last question, on the gas lift.

You talked about that market getting better, but could you give us a sense of maybe what the ROI is for a liquids operator or oil operator for using gas lift?

Is there any sense of -- just give some color on why that market is doing well for you.

Well, of course, on a rental, the "I" is almost non-existent, so it's pretty attractive for them.

But just looking at it generally, if you look at average rental rate on these gas lift units is in the $4,000 range.

It will run higher, run lower.

And these wells, there is no general rule of thumb you can point to.

But these wells, they all react differently.

But I can't imagine that an operator wouldn't be making probably 5 to 10 times that cost just in increased oil production.

Because if you're looking at $4,000 a month for the rent, that is only 40 barrels of oil to break even.

That is a barrel a day.

Nobody is going to do anything for a barrel a day.

So from what we hear and what we have seen, it is quite, quite substantially more than that.

So that is why we are pretty -- seems to be, as long as the commodity price holds up -- and of course, some of this other data we have seen and just our own experience -- certainly through this year we think the market looks to be pretty vigorous.

Thank you.

I will turn it over.

Joe Gibney, Capital One.

Thanks.

Good morning, Steve.

Just curious if we could get an update on where things stand on the VRU market.

Anything new there?

You reference things on track in terms of the application expansion in the Midland.

Just remind us again a little bit on timing on that.

I'd appreciate it.

Yes, okay.

Yes, the VRUs is the same thing we have talked about probably the last quarter, just really not seeing a whole lot in it.

The only thing we are seeing in that market is just very, very small units below our range going out.

So typically the stuff that appears to be having a little movement is 50 horsepower or smaller type units, which we don't plan to get into on a rental basis.

So that is most of it.

I think you are seeing that because, again, a lot of these wells that people are trying to outfit -- very, very small volumes of gas off these tank vapors.

What we are looking for now is more movement into, with these newer drills, this pad drilling and everything else where you are starting to accumulate or combine all the wells together, tank batteries together to get higher volumes of gas vapors coming off these tanks, into where the 50- to 100-horsepower range where we are looking for starts to move.

So I think that will -- we still anticipate it being a market out there, an incremental market and one that hadn't existed; but it is obviously going to be just kind of folding into the rest of the growth at a slower pace than what we anticipated a year ago.

As far as the expansion, we broke ground a couple weeks ago; still looking at probably having it online first part of Q3.

And what I've said, we anticipate since half a year we will probably gain about another 50 compressor throughputs, about 20%, and then with -- so we did about -- we did 277, added 277 compressors to the fleet last year.

So we are just saying nominally that will go to 325 this year.

And then next year another 50 for the full-year effect.

So up to 375 next year.

Okay, helpful.

And just last question, just -- I know this is certainly a utilization-driven game, tightening things up a little bit more.

Where are we on pricing?

Given this pace that you are seeing, the record pace really in April obviously of getting liquids-directed units out into the field, is this an opportunity at this point to be able to nudge pricing a little bit higher on some of your liquids-directed units?

Just a general sense there of where we are on potentials for fleet-wide rate increases.

Yes, we are always pushing them on an individual basis versus a fleet-wide basis.

As I mentioned in the quarter -- or on the call last quarter, we saw a 5% average price increase over the fleet last year, then 10% the last couple years.

Now, of course, some of that was mix shift; but some of it is also some pricing we are getting on these gas lift units.

I think there probably are going to be some more opportunities on that.

Now again fleetwide, it's -- well, fleetwide on the gas lift units, yes, it's a possibility.

Certainly fleetwide, leaving out the dry gas units, because obviously that is a weak part of the business right now.

But yes, we are always constantly looking at that and have the ability to do that fairly quickly once we start deciding to do it.

But we are always looking either strategically from a point of either an area or particular models and things like that to constantly increase the price.

And I think that is what you have seen the last year or two.

All right, fair enough.

I appreciate it, Steve.

I will turn it back.

Peter van Roden, Spitfire Capital.

Can you give us an update on how the new market expansion is going, particularly in the Marcellus and the Bakken?

The Bakken, we are still setting more and more equipment up there.

Still not a big, big area for us.

I think as I've mentioned in the past, we think we are probably a year or two before what we would think would be a bigger rush for compression up there.

There are pipelines going in; there are plants going in.

We see that, but that infrastructure is taking a bit, although it is moving; and we are putting just a little more equipment up there.

But we think most of what we would I guess call a wave of activity up there is still in the 12- to 24-month range.

There's a lot of factors going on up there, not just the infrastructure getting built in, but of course all the flaring that is going on up there; There is a lot of pressure to get that flaring down.

And as I mentioned, if you are not flaring you are probably compressing.

So I think as that pressure continues to mount on operators up there, certainly with the infrastructure going in, just the need to get that flaring down, we are going to see just a continually growing business.

And probably a little slow, like I say the next 12, 24 months.

But then after that I think it will -- we anticipate that being a pretty big area for us.

Marcellus-wise, the Marcellus itself isn't that busy for us right now.

It is typically a larger horsepower market right now, not a whole lot of wellhead equipment going in.

And that is usually the first phase you see in these newly producing developments, especially on the gas side versus say the oil shale side.

So you'll typically have these wells come in; you will put in central compression first; and then as they decline and deplete over time you start putting the wellhead.

So really not fully at the wellhead piece out there right now.

Now, if you scoot over to Ohio and the Utica shale, a totally different play.

Of course, it is oil, oil shale based with associated gas, and we are seeing pretty good growth out there and anticipate some good growth this year.

That was an area that was -- we moved in there in 2012, grew pretty well 2013, wait on infrastructure.

Didn't too much last year, but it looks like it is going to pick up pretty well this year.

So we are looking for more activity out of the Utica anyway.

Got it.

And then if you had to put your crystal ball out and think about natural gas demand in the next couple years, if any of the macro forecasts are right we are going to see a big increase in 2015 and 2016 of supply and demand.

How do you think you need to set up your sales structure or infrastructure differently to try to capture some of that?

Well, I think we are still -- if that happens, and as I said I try to avoid predicting that stuff; I will let you guys do it.

You start to develop multiple personalities when you start looking at these things.

But I agree with you generally.

Trend-wise there is going to be more natural gas demand.

Now, we are still -- again, more than half our fleet is still in dry gas areas, so the Barnett, San Juan.

All the other areas we have got, East Texas with dry gas activities, we are still well placed there, have large share.

Still a major part of our business.

So as gas price starts to potentially come up and demand starts to move with it, or vice versa, I think we are all set.

Now, we are going to watch some of these other areas that we didn't ever really get moved into before the collapse of gas price in 2008 and 2009, more so being the Haynesville and the Fayetteville.

But when the Haynesville went down in 2008 and 2009, those are still pretty good wells.

Not much compression needed on them; they were flowing good volumes, good pressures.

It will be interesting to see if pricing does drive a little more activity in those areas, how those wells come back on.

But if we're in good areas, as we said, now we can certainly capitalize on those.

And then as we have shown in these oil shales in the last three or four years, we're able to move into areas pretty quick.

So if we see demand and a need for gas compression in those areas, I think we can move in pretty well.

Okay.

Final question.

Have you seen any new entrants come into the market recently?

Is there still standard competitive dynamics you have had for the past couple years?

Yes, not really any new ones.

You will get somebody changing hands every year or so, things like that.

But the equipment stays the same; it just gets new owners.

But really nobody moving in overtly to say: I want to be part of this and doing it.

I think one of the things that causes that, of course, no one takes a lot of capital to do this; and it takes you a while to built up a fleet of any size and especially the field-type infrastructure, where the companies in the business now have mechanics in the field, shops, warehouses, parts warehouses, rebuild facilities, things like that.

So it's not real easy just to get in real quick.

If you're trying to get in quick to capitalize on a market, it's a little tougher in this business then maybe most.

Okay, thanks.

(Operator Instructions) Gary Farber, CL King.

Yes, hi.

Good morning.

Just a quick question.

I'm not sure if you went over it before.

Just your expectation for the rollout into the liquids area for this year and for next year.

How do you see the shift?

What kind of shift do you see in your assets deploying between that and the dry gas side?

Not -- we don't see too much of a shift for the oil shale-type compressors going out.

It's -- I think the Permian is still busy, the Niobrara is busy.

Utica over in East Central Texas, busy out there.

So we think those areas are still going to take the majority of our capacity, our build capacity.

Oklahoma is perking up a little more for us.

You may see a little more going up in there.

And there is a couple other areas where we are looking at moving into.

But really I would say the areas we're in now are still growing, still looking good.

A lot of drilling going on, a lot of operators are working there and probably will take 90% of even our increased capacity going forward.

So how about if you looked at your mix of your rental revenue, how much more of it do you think by the end of the year and then into next year at some point this is going to be tied to the liquids?

(multiple speakers)

Well, I think it's going to -- seems like it's -- and again if we just keep the same commodity price scenario, say $100 oil and $4.00 or $4.50 gas, that's the same comparison, I think we will continue to increase the oil portion of it.

Getting to 50%?

Maybe that would be in the next 5% tranche.

Real hard to say.

It wouldn't surprise me if we get there by the end of the year, but it is hard to say what goes on with some of that.

But yes, we could be half and half by the end of the year.

And again, as long as this price differential continues between those two commodities, I think we will continue to grow the oil shale side.

Does it grow -- because like it has really grown to that level what, in like four years or so?

Right.

So should people expect that the increments are going to be -- they are going to be smaller, but you are still going pacing along?

Or is there still room for this thing to be pretty rapid in the near-term?

No, I think they are going to be smaller, just Law of Large Numbers.

The percentage is going to come off just a little bit just because -- well, heck, the last three to four years are -- our fleet is up (multiple speakers) third.

So, but I think probably the number of units going out is going to be the same or higher; but the percentage is going to be dropping down just a little bit.

Although the growth will still be good.

Right, okay.

Thank you.

Veny Aleksandrov, FIG Partners.

Good morning.

My first question is on the margins in the quarter.

Margins were healthy and they increased from last quarter.

(technical difficulty) due to the mix (technical difficulty) or there was also (technical difficulty) impact?

Veny, can you repeat the last part?

It is really (multiple speakers).

You are fading.

Overhaul impact from last quarter.

Okay, all right.

Well, I think this showed what we have always said, that we have 54% rental margin last quarter, 58% now, and 54% typically when we see the margin like that.

We have had a lot of overhauls, and we did see that in that quarter.

But typically when you have those overhauls, they end up going out into the field; and that is what we are seeing.

As I mentioned, Q1 of this year we set more new rental contracts than we have the past three years.

So that carries on with that overhaul expense we had last quarter carrying into this one.

That 58% now, they were down just a bit, obviously, from that number.

I think we are still going to have fluctuations on that going forward.

And certainly if we do see a pickup in natural gas activity -- which again I don't anticipate much, if any, during the summer, but it will be interesting to see how winter comes.

If that happens, we will have some more of that coming.

But again, we get to capitalize on it the next couple quarters.

Thank you.

And then my next question is on the Quad O?

Any change that you are seeing out there?

I know you commented on it last quarter.

Do you hear any thinking on [Congress]?

Any change in what?

Quad O. The Quad O.

Oh, Quad O. Yes, that is the VRU thing.

No, we haven't -- still not seen a whole lot of activity there.

We are just surmising the rules in place -- the rule has been split into two different parts where this April, I think it was newer wells, wells drilled currently or the wells that are two years old had to comply starting this April.

Next year wells that are older than two years old have to start to complying.

So that did break it up a little, which would have normally slowed it down.

But it is a ways slower than that.

Again I think what we are seeing is just operators starting with the smaller, easier wells to handle control right now being very small horsepower.

Essentially what we see is the BCC lighters of the industry; there's kind of disposable stuff going out there, 20-, 30-horsepower equipment that we just don't deal in.

Thank you so much.

(Operator Instructions) Jason Wangler, Wunderlich Securities.

Morning, Steve.

Just curious, you talked a lot about the gas lift.

Could you just may be drill down a bit on what regions specifically you are seeing more demand for that?

I am just curious as far as, as you are deploying out there, what places are really starting to adopt that as a better way to go?

Historically, when I say historically, the last three years, say, where we saw it mostly start out was in the Central East Texas area, starting there.

And then we of course saw it go into the Niobrara, and then the Utica, and then the Permian.

Now the Permian is about -- the Permian really being here around Midland and stretching on over into New Mexico, the Permian part being the more recent one we have seen where operators are starting to try gas lift.

Gas lift has been around forever, as probably most everybody knows; just hasn't been a real big process for people to use to get oil.

Because it's a little of an art and a science to it, and other activities like rod pumping and things like that are a little easier to do and grasp.

They don't take as much operating time.

But I think people are seeing so much increase and production enhancement from gas lift that that has really driven.

And of course these shales and these horizontal sections and everything else lend towards gas lift.

So we think the Permian -- we are seeing operators try it in the Permian.

And some of them work, some of them don't.

But obviously the majority are working because we are putting more equipment out into it.

So I think we still see growing in all those but probably the newest one we have seen the uptake in is the Permian area.

Sure.

I appreciate it.

thank you, Steve.

At this time we have no further questions.

Okay, Erica, thank you; and I thank everybody for joining me on the call.

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

Thank you.

This concludes today's conference call.

Thank you for attending.