Natural Gas Services Group Inc (NGS) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group fourth-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 hand the call over to 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 were made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995.

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

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

Thank you, Alicia and Erica, and good morning, and I welcome everyone to Natural Gas Services Group's fourth-quarter and year-end 2014 earnings review.

The fourth quarter of 2014 capped a strong year for NGS.

Total revenue and gross margins were the highest in our history, and operating income, net income, gross margin, and EBITDA increased in each quarter throughout the year.

We continued to grow our rental fleet and achieved a 14% increase in rental revenues, while increasing our gross margins to 60%.

Although 2015 will be a challenging year, we are well positioned and confident.

With our net cash position, we have the strongest balance sheet in our competitive sphere and anticipate generating free cash flow this year.

We are confident that our expense control, as well as the pursuit of additional sales and product initiatives, will strengthen the immediate and long-term performance of the Company.

I'll comment in more detail as we review the financials.

Starting with total revenue and looking at the year-over-year comparative quarters, our total revenues increased 17%, or $4 million, from $23.1 million in the fourth quarter of 2013 to $27.1 million in the fourth quarter of this year -- of 2014.

Rental revenues increased 11% this quarter compared to the same quarter last year and sales revenues were 44% or $1.9 million higher.

In the sequential quarters of the third quarter of 2014 compared to the fourth quarter of 2014, total revenues were up nearly 6%, or $1.5 million, to $27.1 million.

Rental revenues grew, but compressor sales were a large driver of this quarterly growth with a $1.2 million or a 22% improvement.

On a full-year basis, total revenues increased 9% to $97 million, while rental revenues grew 14% to $79 million.

These revenue levels are above record for the Company.

Moving to gross margin and comparing the fourth quarter of 2013 to this current quarter, total gross margin was up 25%, from $11.9 million to $14.9 million, and gross margin increased from 51% to 55% of revenue.

Sequentially, total gross margin increased 7% to $14.9 million, which was 55% of revenue.

This compares with last quarter's gross margin of 54%, with the difference being driven by higher rental margins.

On a full-year basis, comparing 2014 to 2013, gross margin is up 11% to $53.9 million, or 56% of revenue.

This is our highest gross margin dollar amount in the Company's history.

Selling, general, and administrative expenses fluctuate depending on the comparative period, but we have maintained those costs in the range of 9% to 11% of revenue over the last two years.

Operating income increased by 35% in the comparative year-over-year quarters by approximately $1.7 million up to $6.7 million and increased almost 15% in sequential quarters.

Operating income is running at 25% of revenue for the quarter and 23% for the year.

On a full-year comparative basis, operating income was steady at $22 million.

This was essentially flat due to higher SG&A expenses, primarily in noncash employee stock and options and higher depreciation expenses of $3.4 million from rental fleet additions.

In the comparative year-over-year fourth quarters, net income increased 27% to $4 million this year and increased over 3% in the sequential quarters of Q3 2014 compared to the fourth quarter of 2014.

Net income was $14.4 million in 2013 compared to $14.1 million in 2014.

This slight difference was due to the same reasons just mentioned, higher SG&A and depreciation expenses.

Our net income has averaged 15% to 16% of revenue in the comparative periods.

Our income tax rate in the third quarter this year was 34.5% and increased to 36.2% in the current quarter.

I also want to make an additional comment about our tax rate and the impact on our earnings.

As you may know, over the past few years Congress has allowed accelerated depreciation rates called bonus depreciation.

These rates have varied between 50% and 100% acceleration of cash tax depreciation, but unfortunately, since our Congress can't seem to get their act together, these have been renewed the last couple of years in December retroactively for the year.

This obviously impacts tax planning, but I wanted to note that we did opt to take the bonus depreciation 2014 at the expense of booked taxes, but to the benefit of cash taxes.

The bottom line is that our tax rate in the fourth quarter of 2014 is over $0.03 in earnings higher than what it would have been otherwise, but we will benefit from a $4 million cash refund.

The folly here, of course, is that we had to pay cash taxes at a higher rate through the year because of Congress' late action.

EBITDA increased in both year over year and sequential quarters.

On a year-over-year basis, EBITDA increased 25% from $9.9 million in the fourth quarter of 2013 to $12.4 million in this current fourth quarter of 2014, while sequentially EBITDA climbed almost 8% and is running at 46% of revenue.

Comparing the full years of 2013 and 2014, EBITDA grew 7% and averaged 45% of revenue.

On a fully diluted basis, EPS this quarter was $0.32 per common share, a 28% increase over the year-ago quarter and approximately 3% higher than the previous quarter.

Our full-year earnings per share -- diluted earnings per share was 11 -- $1.11 per share.

Total sales revenues -- this includes compressors, flares, and aftermarket activities -- grew $1.9 million in the year-over-year quarters, from $4.4 million in the fourth quarter of 2013 to $6.4 million in the fourth quarter of 2014.

The increase was primarily attributable to higher compressor sales than last year.

For the sequential quarters, total sales revenues increased $1.2 million, from $5.2 million to $6.4 million.

Reviewing compressor sales alone, in the current quarter they were $5 million, compared to $2.6 million in the fourth quarter of 2013 and $3.1 million last quarter.

We ended 2014 with $10.9 million in compressor sales, compared to $10.7 million in 2013, with both years within the $10 million to $15 million range we predicted.

Our compressor sales backlog was approximately $5 million on December 31, 2014, and we estimate that this will be built out over the next couple of quarters.

This compares to a backlog of roughly $3 million in the same period at the end of 2013.

Rental revenue had a year-over-year quarterly increase of $2 million or 11%, from $18.5 million in the fourth quarter of 2013 to $20.6 million for this current quarter.

Gross margins exhibited a very healthy increase from 54% in last year's comparative quarter to 62% this quarter.

This margin expansion, combined with our higher rental revenues, contributed to 28% higher rental gross margin dollars in this current quarter.

Sequentially, rental revenues grew from $20.2 million to $20.6 million, with gross margins of 62%, up from 60% the previous quarter.

Looking at the full-year comparison, rental revenues increased 14% from $69.1 million to $79 million.

Gross margins have continued to expand, averaging 60% this year versus 58% in 2012 and 2013.

Diving into this a little more, our gross margin per unit per month has increased 22.5% since 2011 and grew by 24.5% on a gross margin per horsepower per month basis.

These superior margins are due to higher pricing and effective cost management and continue to be among the highest, if not the highest, in the industry.

Average rental rates across the active fleet increased 5% in 2013 and over 3% in 2014.

Average rental rates for newly set units this year are almost 10% higher than we saw in 2013, so we continue to exert appreciable pricing power on newly set equipment.

Fleet size at the end of September was 2,879 compressors and we had a net addition of 37 compressor units this quarter.

We added 323 compressors to the fleet in 2014 for a fleet growth rate of almost 13%.

The relatively lower number of compressors added in the fourth quarter was due to our previously discussed plan to scale back rental production because of a reallocation of factory floor space towards higher compressor sales volumes.

Our active fleet utilization is essentially the same as it was last quarter, or 76%, but our active and contracted compressor utilization is at the 79% level.

In 2014, we spent a total of $53 million in capital expenses, with 97% of that, or $51.5 million, dedicated to rental fleet expansion.

Looking ahead into 2015, we project that our capital expenditures will be in the $10 million to $15 million range for the first six months of the year, so half of the year.

There's very little visibility from customers on what their needs may be, but we see some potential opportunities and are positioned to ramp up quickly if need be.

We will adjust our capital spending up or down depending on the market, but our projected spend enables us to stay well within operating cash flow.

Going to the balance sheet, our total short-term and long-term debt remains less than $500,000 as of December 31, 2014, and cash in the bank was a little over $6 million.

Our cash flow from operations was $34.6 million in 2014.

From a liquidity perspective, we are in an enviable state.

Our line of credit was renewed a couple of months ago at the same rates and levels and we have a cash balance and the ability to add to it.

We have funded over $170 million in capital expenditures since 2009 without borrowing any of it.

That's extraordinary for a capital-intensive business like ours.

Now let's talk about the market as we see it going into 2015 and how NGS is particularly well positioned.

First, and I'm sure you are all aware, is that we are on the production side of the E&P cycle, meaning that's the drilling-oriented services that tend to take the quicker and harder hits, while production-oriented businesses tend to hang in better.

Secondly, NGS carries a net cash position on our balance sheet and we anticipate adding to that cash balance as the year progresses.

Not only does that allow us more financial and operational flexibility, but we are also better able to capitalize on opportunities as they present themselves.

We are coming into this downturn with a better mix of equipment.

We are now equally exposed to oil and gas shales from a rental fleet perspective, as opposed to 2009 when we were 100% gas shale oriented when gas prices collapsed.

This diversification should help buffer some of the headwinds.

We have also reoriented our business more heavily towards rentals.

Today, our topline is roughly split 75% rental revenues with about 25% to sales revenues, whereas in the last downturn we were at about a 50-50 split.

Since rental business holds up better due to its annuity-like nature, this should also help us through this period.

We earn some of the highest margins in the oilfield services business, so we are no stranger to controlling our cost.

Look at our margins, our balance sheet, and our overhead rates for proof of that.

Our service reputation continues to be one of the best in the industry.

As we saw in 2009 and we are already seeing now, customers realize that the two Rs, response and runtime, are important, especially in a downturn, and they are willing to pay for it.

We pull all this together with a cadre of people that have experienced up and down markets.

80% of our executive and operational management have been with us since the last downturn, so we have all been tested as a team.

In the midst of this maelstrom, we are also taking some aggressive actions that we think will pay off in the short and long term.

As I mentioned on the last call, we are expanding our sales staff in an effort to open some new areas and penetrate existing ones.

We're about halfway to where we want to be and we have already posted new people in a couple of new areas.

We're continuing our product development efforts.

This is a two-pronged approach, with the first being the design and rollout of a 350 horsepower and 500 horsepower compressor frame.

As you know, we are the only rental company that has our own compressor brand and we have had a lot of success with the existing 125-horsepower and 250-horsepower frames.

We see a market need for a higher horsepower product from NGS and we should have a prototype in the field for testing this year.

However, to take advantage of this market, we are already building on a pre-contracted basis some larger units.

On the other end of the spectrum, we have recently rolled out our first VRU, or vapor recovery unit.

If you recall, the regulations to control methane emissions on locations are getting stricter and we are starting to see some interest for VRUs in our horsepower range.

Certainly, we are driven by our capitalistic tendencies in addressing this market, but it also allows us to repurpose and deploy some existing equipment we have.

We are taking defensive actions as required, but we also see opportunities that we will be capitalizing on.

No one likes a downturn, but we have positioned ourselves well, and no matter the environment we are confident that NGS will continue to execute as required.

That's the end of my prepared remarks and I'll turn the call back to Erica for questions that anyone might have.

(Operator Instructions).

Joe Gibney, Capital One.

Just a question on sales.

Your backlog pick up here to $5 million exiting the year implies a pretty decent amount order quarter.

You referenced it in some of your prepared remarks and you are pursuing additional sales.

I mean, this is a subsegment that typically turns off pretty quickly as we enter a downturn, but it sounds like you had some tailwinds at least in the fourth quarter.

So could you talk a little bit about maybe what transpired on the order front there in 4Q and your outlook near term?

Yes, we came into 2013, I think it was about Q2 or so we had a pretty good backlog built up there, about $10 million, then it tended to obviously be built off and come off throughout the year.

Then into Q4, we got some good orders in Q3 and continued into that.

As I mentioned on that Q3 call, we were even having to shift some floor space towards sales, away from rentals, which obviously worked both ways.

You got more sales and then we needed to tamp down the rentals anyway.

So going into 2014 and 4, we got the $5 million a little higher than where we were comparatively last year at this time, but as you know and everybody knows, sales is the one that takes the harder hit in a market like this, typically.

So we think that we'll -- obviously it's -- we'll build that out over the next couple quarters.

It still is -- if you annualize that, that's still in our realm that we've been telling people of $10 million to $15 million, kind of our steady rate on that.

So I'm a little encouraged by that backlog number.

Now we'll have to see what happens going forward because it's almost a new world every day, based on rig counts and what customers are saying and doing and everything else, but that's probably a little stronger than I would've expected coming into a market like this.

Now when I say we've added salespeople, we've added people primarily to push rentals and I may -- I probably misspeak a little when I say we're going after sales or whatever.

Obviously we're going after -- we're not going to avoid a sale if somebody wants us to build something, but we have put these people in primarily to penetrate the rental markets.

But I think we will get some sales out of some of that work, too.

Okay.

And then onto build cadence on your rental fleet, the guidance you're giving on CapEx, at least for the first half of the year, $10 million to $15 million, so reasonable to be in this kind of 30- to 50-unit per quarter run rate is not dissimilar to what you saw in the fourth quarter as being reasonable, at least for the first half, and we'll see how the market develops.

Is that a fair statement?

Yes, the -- I sit here trying to remember the number.

I think that's going to be in a reasonable range.

Again, like I mentioned, we adjust our capital pretty quick, and just as we did going into 2009, the last downturn, and as we have done here, we pull back pretty fast and get to a comfort level going into an uneven market like this, and we can ramp up or down pretty quick.

Our guys are pretty good at doing that.

It keeps them up at nights, but they can do it.

So we're going to run at that rate, that $10 million to $15 million, and again just giving you a six-month look because I'm not sure anybody knows what's going to happen in August or the last half of the year.

So we're going to run like that.

We've got that schedule pretty well set out, but we've got some -- obviously some slots we can put in, if we need to.

So it's -- that's a very fluid number.

It may go up.

I don't think it'll -- I think that $10 million to $15 million range, I don't think it will fall down out of that range, but if we see some opportunities, maybe it could get a little stronger.

Okay, great.

I appreciate it, Steve.

I will turn it back.

Ken Sill, Global Hunter Securities.

Yes, guys, it's nice to have a quarter like yours.

Thanks.

Given all we've been through here in the last couple months.

Could you repeat the size of the fleet at the end of the quarter again?

I'm not sure I got the right number on that one.

Yes, let's see.

I think it was -- yes, 2,879.

2,879, okay, that's right.

And what are the terms -- how long do these rental contracts run, on average?

We'll quote six to 12 months, which is pretty much the industry standard, but typically equipment will stay on location two to three years.

Just because you run out of the minimum term, that's just a contractual obligation for the customer to keep it so we can have a chance of getting some money out of it.

But they'll typically keep it as long as they need it and that average usually runs two to three years.

And I don't expect them to be turning compressors back, but it's -- they're asking everybody for price concessions.

Have you guys had any pushback on that yet?

Yes, I mean, that's something we were anticipating.

It happens during these downturns.

It's not a hand-wringing exercise; it's something that's going to come about.

So we've seen some of that.

It hadn't been -- it's been very manageable and reasonable, and I think as I've alluded to in some of our remarks, our service guys in the field have a great reputation and experience out there with the operators.

So we typically are able to hold any concessions that we may need to give to a pretty reasonable amount and certainly much less than what the market may be tending to do.

So I'm pretty satisfied with where we are in that realm right now from what we're having to do and then the frequency we're seeing it.

Now I will address the comment a little, compressors being set and terminating and everything else.

We're going to continue to see that rollover certainly of compression going out and coming back and everything else.

The challenge is going to be trying to keep that utilization reasonable -- not reasonable, but flat or within the flat realm.

I think it's -- we anticipate utilization coming off somewhat during a downturn like this.

I don't think there's any way to avoid it.

Even when you have a situation where we're a production enhancer on these wells, especially gas lift wells where we're helping lift some of this oil out, you're still going to have some operators meeting some economic limits on some of that stuff at $50, no matter what you're doing with the gas lift unit.

Yes, you've got a lot of cost cutting going on, and sometimes people just cut cost to cut cost.

So we anticipate having some pressure on the utilization rates.

So I think we will see some of that, but I don't think it's going to be -- certainly it's going to be manageable relative to everything else that we do.

So I guess with the low CapEx in the first half, are you keeping the compression rental fleet where it is or will that nudge it up a little bit?

Well, it will grow a little.

It certainly not going to grow like it has the last three to four years.

If you take -- I mean, if you just take the $10 million to $15 million and annualize it, and we're not projecting that, but just a simple calculation, that gets you to maybe about half of the capital spend rate we were running last year.

If you do that, we've built a little over 320 compressors, so that puts you in that 150 compressor range.

Now, again, we're not saying that.

We're just saying right now our visibility is only good up through about June, so that $10 million to $15 million, so obviously we're going to see -- expect some decline in that capital spend well within our operating cash flow, so we'll be adding cash to the balance sheet.

But, again, if we -- we look at this -- every month, we sit down and look at the capital, what's going through the shops, what's renting, what the utilization is, and we base 80% of the decision on utilization.

So if we see utilization ticking up a little, we may build a little more; if we see it ticking down, we're going to conserve a little more.

Okay.

Then last question and I'll let somebody else get on, if they're out there.

60% margins are great.

That tends to attract competition and I just noticed -- I don't cover them, but I noticed that Exterran is going to unwind their big experiment and break it into a domestic and international company.

Do you think that changes the competitive landscape for you guys or is that really not going to have a big impact?

No, I don't think it does.

I mean, no matter what they do structurally, we're still competing against them head to head every day out in the field and that's not going to change, so I don't see anything happening there from a competitive standpoint.

Like I mentioned, we've got a very good reputation, very good guys in the field, and we'll just continue that.

As we did again in 2009 and we've reiterated at this time to our guys, we're going to cut a lot of expenses and we're going to tighten up just like everybody else, but we're not going to cut our service response.

So we're going to respond quickly, we're going to get this stuff back online so run times stay up, and that's what enables us to keep the margins and charge the better prices.

That makes sense.

All right, thank you.

Peter van Roden, Spitfire Capital.

On the rental build rate, so, as you said, you're looking to add, I guess, maybe 75 units in the first half of 2015.

How many of those are spoken for versus building on spec?

You know, at any given time as this stuff goes through, probably right when you order the components, the engines and compressors, very little are because you've got such a long delivery cycle now with engines and compressors.

Compressors are not bad, being our own compressor, but engines still being out in that four- to five-month range.

Now it's going to be interesting to see how that stuff loosens up as we go forward.

But you've got such a long lead on buying stuff that an operator typically won't commit to rental that far out.

So usually when you get to the end of that cycle within, say, four to six weeks of something rolling off the floor, you'll start getting commitments on it.

Now the stuff we're building now, the equipment -- the particular models we're building now still have over 90% utilization rate; otherwise, we wouldn't be building them.

So by the time it rolls off, nine out of 10 of them are going to a job somewhere.

That's the big thing we use, as I mentioned a while ago.

Right now where there's pricing or build is utilization, and we're not going to be building anything that's probably not -- that's probably utilized 90% or less.

Now 90% or more and based on what the sales guy see and if we anticipate some demand, that's our build.

So we're going to use that to gauge how we price stuff and what our capital spend will be.

Got it.

And then as you think about controlling margins this year in terms of price concessions and the utilization, how does that play out in the rental gross margin and how do you guys control that versus what the market is going to dictate to you?

It impacts it if you are not taking other actions and just sitting there.

If utilization has taken a little hit and prices take a little hit, it will impact it, but that's where we -- again, that's where the other cost-cutting maneuvers come in from, whether it's you're rerouting guys on what they're doing, your overtime, etc., etc.

There's a lot of levers we pull and we've already started pulling those months ago.

But the other thing, as I mentioned, that we're trying to do, too, is penetrate some of these markets, too, with getting some additional rental and sales guys out there to really try to take advantage of a downturn.

In a situation where some competitors can't, they are going to have to cut back and everything because of either debt or distributions or whatever it is, we think this is an opportunity to maybe go in there and do some of that stuff.

So it's not an easy task, but we will tend to try to maintain our margins versus trying to maintain any market share we've got.

That's what we did back in 2009.

That's our basic strategy.

We can -- the problem is when you start giving up a whole lot of price, it takes a long time to get it back, and customers are reluctant to give it back because they're in the same situation.

So we think we can get markets back pretty quick and we're willing to give up a little bit of share as we go through these periods to maintain those margins.

Got it.

Then a final question from me, can you just walk me through the difference between your current utilization and the utilization plus contracted, and how that plays out from the end of the quarter until the next quarter?

Yes, the difference is just merely what we've already got contracted, but is not out earning revenue yet.

So either it has been contracted, it's coming through the build cycle, or it's in the yard getting ready to go out, or it may even actually be on a location, but it hasn't started up and started earning rent yet.

So that's the difference.

It's about a 3% difference.

It's been running that way, it looks like, about the last year or so.

So that's the only difference.

The basic utilization is just what's out there earning revenue now.

The basic plus contracted is what will be earning revenue.

Got it.

Okay, thanks.

Great quarter.

Thanks.

Rob Brown, Lake Street Capital.

I wonder if you could put some numbers on your utilization, how far it goes down, what's your sense on where utilization will bottom?

I know it's hard to predict, but how many points of utilization reduction should we think about?

Oh, boy, a little hard to predict.

You know, it is -- it is a tough thing because, again, just like I've mentioned, we will typically -- I mean, we use utilization to make a lot of decisions, whether it's pricing, build schedules, whatever, but on the other hand, we don't use it to drive too much of what we're trying to charge out there, either, because as I just mentioned we will try to maintain margins and sometimes that's at the expense of utilization.

So we've had very strong pricing power, I think the best in the industry, from what I can tell, and we want to maintain that and hold that.

So we're pretty reluctant to cut pricing as severely as others may and we're willing to give up some equipment, some share, if it's not what we think we ought to be doing.

So let's see, have you forgotten your question yet?

It's hard to -- I don't know.

It's real hard.

Maybe it gets down to the high 60s, low 70s.

In one case, you could say yes, pretty easy; in another case, you say it kind of depends on how much traction we get with some of these sales initiatives and some of this other stuff, too.

Maybe that's the best guess.

Maybe we get a 10% drop or something like that.

Okay, great.

Thank you.

And then on the sales expansion, what territories are you expanding sales into and what's driving that expansion?

Is it that they are still active?

Yes, I'm not going to disclose where we're going, just from a competitive standpoint, right now.

But yes, it's areas that we actually are -- have some equipment in, but we haven't in the past had enough to really fill it out because all the other areas have been so busy, so now that we've got a little more leeway to do something, to place some equipment or build equipment, we've put these guys into.

Some areas just haven't been big for us yet, but we think there's a lot of opportunity.

We've already got people -- some equipment there, some service presence, and everything else.

So we think it's going to be a pretty efficient buildout from a time and money standpoint.

And it's not a new -- don't worry, it's not the Tuscaloosa marine shale or anything like that.

It's pretty standard stuff that we think we can just get some incremental business off of.

Okay, great.

Thank you.

Jason Wangler, Wunderlich.

Maybe dovetailing on that last question, just could you maybe talk about regionally what you're seeing, maybe even specifically up in the northeast?

It seems like that market has held in better, at least from a spending perspective and rig count so far, whether it's Marcellus and Utica.

Where do you see your activities up there because it seems like that might be an area of growth going forward?

Yes, it is.

The Utica looks good to us.

The Permian looks good to us.

These are the same areas that I'd mentioned before.

I'd mentioned before the three areas.

Utica, Permian, and Niobrara is where we thought might be the relatively stronger areas for us.

Utica and the Permian are proven to be that way.

The Niobrara has probably slowed down a little more than we anticipated, but we think there's still opportunities out there with our standard equipment and potentially these VRUs, also.

So those are the two to three areas that we see being really -- in those particular areas, being growers.

Okay.

Maybe could you comment, the bigger units sound like a pretty interesting opportunity.

Are there certain places or certain types of wells that those are really focused on?

Is that maybe to your point about what are some of the areas that you're trying to go to?

Just trying to understand what the plan is as far as as you go up the horsepower side.

Yes, well, we think there's three primary submarkets in that bigger horsepower market.

Number one is just what you say.

Sometimes you have bigger wells that our equipment really can't -- is not big enough to pump.

So you either have to put two or three units out there.

Operators don't like doing that.

So a lot of times, we just haven't had any equipment for that.

So just number one, A, just get a bigger well.

It's got more gas.

It needs more horsepower.

Number two and three are things we see developing and we think will continue over time.

Number one is gas lift, the centralized gas lift, so we've been doing a lot of gas lift the last three to four years on a wellhead basis, and that's really -- I mean, we've made a great mark there with customers and our equipment and everything else.

And that's going to continue, but you're seeing more and more centralized gas lift going in, too.

So that's typically bigger horsepower located centrally and then just running gas lines out to wells instead of having an individual wellhead compressor.

So we think both markets will be good, but this is a -- the centralized one is a growing one that we think we can tap into.

The other is pad drilling.

Pad drilling is going to be even more and more popular as you go, so when you have four, six, eight wellheads on location versus one, you need bigger horsepower because you're pumping more gas volume.

So we think that's another market.

So one of the markets has always been there are just bigger wells, but these other ones are growing, we think, and we think we can jump right in there, too.

And the good thing about this horsepower, moving up this horsepower, is we're still in the realm that we claim as 100 to 500 horsepower range; we're just moving up with much more vigor into this bigger horsepower.

It ought to be new revenue streams with very incremental costs because it's really going to be the same -- our same sales force, same customers, same areas we're already operating in.

We'll just be infilling with some bigger horsepower.

That's great.

I'll turn it back.

Thank you, Steve.

(Operator Instructions).

Joe Pratt, [Steveholme].

Hi, a quick question and this is a random item.

I think on the USAC call, they mentioned that quite a bit of supply of lubricants are used with your compressors and the declining cost of that could help margins.

Is that relevant at all?

Yes, that is some of the stuff that obviously all of us do, us and them and everybody else, and you get -- and that is one of our initiatives we have got going on.

Just like our customers come back to us and want some help, we're looking to our suppliers, too.

So we try to spread the good news around.

So yes, we're going to see lubricant prices come off; some other things, hopefully, will come off, too.

We're still a little bit early in this cycle to see some of the big items come off, like engines, things like that.

But there's going to be a lot of the ancillary and wearable and disposable items that do.

Okay, thank you very much.

Veny Aleksandrov, FIG Partners.

The 300 and 500 horsepower, without giving us an exact date, what are your plans?

When do you think you're going to be able to deploy them?

We've got a prototype frame already built, and additional background for everybody -- our compressor brand is called a CiP, capital C, little I, capital P. And that just stands for cylinders in plane; it's kind of an engineering term.

But that's been our bread and butter on this gas lift stuff for four or five years and we've had this product line for more than 10 years.

So it's a great little machine.

It's got a lot of unique little features for wellhead equipment.

It helps us build a smaller footprint, lighter weight, etc., etc., so very popular with customers.

So what we've done, obviously we've got this 125 and 250 horsepower frames we're using the heck out of.

But seeing these other markets developing this 350 and 500, we're going to go -- physically, it's going to be bigger in size because you're putting more cylinders on it and having to take bigger engines and stuff like that, but we've got the first prototype frame built and we're starting to contract some production items.

Obviously, we don't own a foundry, don't do the castings ourselves.

We contract that stuff out, so we're in the mode of, number one, finding a home for the first prototype, put it out on a well, use and abuse it, and make sure everything is working the way we think it ought to work.

Simultaneously, starting to contract some of the parts and pieces to it, and then, hopefully by the end of this year we've had this prototype out, worked it on a real live well, done all we needed to do, and then we'll be ready to start deploying into 2016.

Thank you so much.

And also, if we check on the margins on the rental fleet and they are very good, very impressive this quarter; at the same time, you said that you have some pricing pressure.

Are we about starting the pricing pressure because with pricing pressure, how did you get to the 62% (multiple speakers)

That's magic.

I can't tell you the secrets.

Well, we didn't have as much pricing pressure in Q4.

Now we had a little, but not as much, so it's really just a matter of not seeing a whole lot of it at that point.

But we're starting to see it.

It's real out there.

Everybody's seeing it.

Everything you read is true.

Now the amount you read may be true for some and not true for us.

As I mentioned, we're able to control them, it seems, a lot better than most.

So we'll start seeing more of it kick in as we go through 2015 and we won't -- I mean, we're not going to keep track and try to quantify what it is, just except for the point that we're just seeing single-digit issues right now versus anything more extreme.

Thank you so much.

(Operator Instructions).

At this time, we have no further questions.

Okay.

Thanks, Erica, and thank, everybody, for joining on the call.

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

Thanks.

This concludes today's conference call.

Thank you for attending.