Natural Gas Services Group Inc (NGS) 0 Q0 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group 2017 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'll now turn the call over to Ms. Dada.

You may begin.

Thank you, Erica, and good morning, listeners.

Please allow me 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, 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, 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 Stephen Taylor, who is President, Chairman and CEO of Natural Gas Services Group.

Steve?

Okay.

Thank you, Alicia and Erica.

Good morning, and welcome to NGS' first quarter 2017 earnings review.

NGS had a good first quarter.

Our rental utilization held relatively steady, and our sales activity continued strong.

We did have a significant noncash, nonoperating incremental expense increase impacting our SG&A due to the accelerated expansion of some stock compensation, though.

This negatively impacted our reported operating income, net income, EPS and EBITDA results.

However, our operating performance is better than expected.

As noted in the past, we anticipate utilization of pricing pressure through the first half of this year, but do anticipate some relief in the back half.

Cash generation is strong.

Debt is minimal, and we continue to be positioned very well.

I'll comment in more details when we review the financials.

Starting with total revenue and looking at the year-over-year comparative quarters, our total revenues decreased from $21.6 million in the first quarter of '16 to $18.9 million in the first quarter of this year.

We saw gains in both sales and service and maintenance a little over $1.8 million, while rental revenue saw a $4.5 million decline over the prior year.

For the sequential quarters of the fourth quarter '16 compared to this quarter, total revenues were up 13% or $2.2 million from $16.7 million to $18.9 million.

While rental revenue decreased by $575,000, sales revenues increased $2.8 million.

Moving to adjusted gross margin and comparing the first quarter '16 to this current quarter.

Total gross margin was down from $11.8 million to $8.7 million.

This is primarily due to lower rental margins in the year-over-year period and a mix shift towards relatively lower margin sales revenues.

Sales comprised 35% of our business this quarter compared to 23% in last quarter.

Sequentially, total gross margin was off 4.5% or a little over $400,000 from $9.1 million to $8.7 million.

Our sales, general and administrative expenses rose by $475,000 in the year-over-year quarters and by $860,000 in the sequential quarters of Q4 '16 compared to Q1 '17.

NGS has consistently controlled our SG&A expenses very tightly.

But this quarter, they were driven appreciably higher by an incremental noncash, nonoperational charge from accelerated stock compensation expenses.

The added expense was significant at almost $1 million.

Under certain conditions, there are instances where all or part of stock compensation that's normally amortized over the vesting period, 3 years in our case, is accelerated and charged in the quarter it is granted.

This is what we experienced this quarter.

Note that without that incremental stock expense, our SG&A would have been lower by 4% compared to last quarter and 18% lower than the first quarter '16.

For comparison purposes, I will separate out this expense in the following comments.

Operating income decreased $3.4 million in the comparative year-over-year quarters, down from $3.8 million to $343,000 and was driven primarily by rental revenue declines and the aforementioned incremental stock compensation expense.

Without the incremental stock expense, operating income this quarter would have been $1.3 million.

Sequentially, operating income decreased $624,000 with the majority of the decrease due to lower total adjustment gross margins plus higher SG&A from the increased stock comp expense.

Without the incremental stock expense, operating income would have increased to $1.3 million, a 32% increase.

In the -- looking at net income.

In the comparative year-over-year first quarters, net income dropped to $250,000 this year, down from $2.5 million in the same quarter of 2016.

However, netting out the incremental stock comp expense, our net income this quarter would have been a little over $930,000.

The sequential quarters of Q4 '16 and Q1 '17 saw net income decrease a little over $900,000 from almost $1.2 million to $250,000.

Again, netting out the added stock comp expense, net income would have been over $930,000.

Our income tax rate in the first quarter of this year was 26.8%, which is down from 32.9% in first quarter 2016 but up from a negative tax rate in the fourth quarter of 2016, driven, if you recall, primarily by R&D credits.

EBITDA on a year-over-year basis decreased from $9.3 million in the first quarter of '16 to $5.7 million in this first quarter of '17.

Sequentially, EBITDA was down from $6.9 million to $5.7 million.

Without the incremental stock comp expense, EBITDA would have decreased only $350,000 between quarters.

Our reported EPS this quarter was $0.02 per common share -- common diluted share.

It would have been $0.07 per diluted share without the incremental stock comp expense.

Total sales revenues, which includes compressors, flares and aftermarket activities in the year-over-year quarters, increased from $4.9 million in the first quarter '16 to a little over $6.6 million in this quarter.

For the sequential quarters, total sales revenues increased $2.8 million from $3.9 million to $6.6 million.

We obviously had a very good quarter in our sales business.

Reviewing compressor sales alone, in the current quarter, there were $5.6 million compared to $4 million in the first quarter '16 and $2.6 million last quarter.

The 15% gross margins on our compressor sales this quarter compare favorably with the 16% in the first quarter '16.

It is off from the 25% gross margin we had in the fourth quarter '16, but this is largely due to the equipment mix build during the quarter.

The comparison is tough, too.

That high a level of gross margin on compressor sales is excellent in this margin -- in this market.

Our compressor sales backlog was roughly $6 million at the end of 2016 and had dropped to about $2.5 million on March 31, 2017, the end of the first quarter.

However, we just received a large order earlier this week that increased the backlog to $8.5 million to $9 million, which is our highest compressor sales backlog in many years.

Additionally, the order includes some much larger horsepower-sized units than we have averaged in a while.

We also think this order can grow nominally over the year, although we probably wouldn't see added equipment delivered until 2018.

This is a significant win for us and may open added opportunities with this customer and others.

This backlog, which we should be able to deliver this year, combined with our actual compressor sales this quarter, add up to about $14 million in compressor sales we anticipate in 2017.

This is already ahead of our 2016 full year compressor sales revenue of $10 million.

Rental revenue had a year-over-year quarterly decrease from $16.4 million in the first quarter '16 to $11.9 million this current quarter.

Adjusted gross margins dropped from 65% in last year's comparative quarter to 61% this quarter.

Sequentially, rental revenues decreased from $12.5 million to $11.9 million with adjusted gross margins of 61% for this quarter compared to 62% last quarter.

Average rental rates across the active fleet decreased a little over 7% compared to the first quarter of 2016 and 1.8% over the fourth quarter of last year.

Average rental rate for newly set new units, which is what we call the spot pricing, are down this quarter nearly 20% when compared to the first quarter of 2016 and 8% lower than the fourth quarter of '16.

Fleet size at the end of March was 2,531 compressors, and we had a net addition of 1 rental compressor this quarter.

Our active fleet utilization this quarter was 50% on both the horsepower and the unit basis.

This is down from 51% last quarter and appeared to continue the flattening trend we have seen in the past few quarters.

To recount, the delta change in utilization over the past 5 quarters since the fourth quarter of 2015 has been 8%, 5%, 3%, 2% and now 1%.

So we're beginning to see some stability in this and potentially a bottoming.

From an activity perspective, there are some positive signs.

Comparing all of 2016 to the first 4 months of 2017, signed contracts for rental equipment are running at an acceptance rate this year that is 50% higher than 2016.

Additionally, for the same period, equipment terminations are running at half the rate of 2016.

This trend is also verified when we look at the churn rate.

That being the quarterly number of contracted units, divided by the quarterly number of terminated units.

A churn of 1 means that you are setting the same number of units as you're getting back.

So obviously, the higher the number, the better; 2 means you're offsetting 2 units for every 1 terminated, et cetera.

It appeared over the time the activity that we've been in for almost 3 years, the numbers will run less than 1 meaning we're getting back more than we're contracting.

Although we still see the churn rate below 1, this is the fourth quarter in a row that we have seen improvement in the ratio of rented versus terminated units on a quarterly basis.

Last call I mentioned that we would earmark $5 million to $10 million for CapEx in 2017.

We spent a little less than $500,000 this quarter.

But recall from last call that we have allocated $5 million to engine and compressors that have already been ordered.

They just haven't been received, fabricated or capitalized yet.

As far as the balance sheet goes, our total short-term and long-term bank debt remains under $500,000 as of March 31, 2017, and cash in the bank was a little over $74 million.

Our cash flow from operations was very strong, nearly $11 million for the quarter, and free cash flow was essentially the same.

The strong free cash flow generation this quarter was driven primarily by higher revenues, improved AR and AP performance, tax payment timing and low CapEx requirements.

Summarizing the quarter, there's still too much idle equipment in the market, and we continue to see bad pricing, and utilization pressure is a result of that.

But our results this quarter have some encouraging signs in them.

First, our sales win and dramatically improved backlog has positioned us well for the balance of the year in that segment of the business.

Our rental fleet utilization has exhibited increasing stability over the last few quarters.

And make no mistake, I think we can still see some choppiness here, but it certainly appears to be bottoming.

Our rental churn rate has also improved over the past year on a quarterly basis.

It's still negative, but it's pointing upward.

And consistent with my comments the last few quarters, we think the last half of the year will continue to show improvement, certainly due to the positive company-specific indicators I just noted, but also due to some macro factors.

I've always cautioned everyone that being on the production end of the business versus the drilling side, we are later-term participants in any downturn or recovery.

Confirming this was a Schlumberger chart in one of their recent investor presentations showing the 6- to 9-month lag between drilling and production.

Now depending on when you want to start those 9 months, our turn to participate in the upturn should be in the latter half of this year.

Surprisingly, there are more [docks] drilling uncompleted wells being drilled now than even in the past.

In February of 2017, there were a record 1,764 wells uncompleted in the Permian basin alone.

In that same month, 395 wells were drilled, but only 300 or 75% were completed.

Some of this is an operator's choice, but more and more is driven by the quick strengthening seen in the pressure pumping part of the industry and the intended demand for fracturing crews.

They are running behind and completions are off-schedule, and there are some added infrastructure issues being experienced, primarily pipelines.

As these constraints are alleviated, they should ultimately lead to additional production activity in the future of which NGS should be a recipient of.

Although it's still a battle, each quarter, we're seeing more positive signs.

And I'm cautiously optimistic it will continue.

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

(Operator Instructions) Our first question comes from Tate Sullivan from Sidoti & Company.

Great comments on the backlog growing for compressors.

I mean, if I back into -- can you just -- can you give me more detail, if you can, on that backlog and incremental order after the quarter?

I mean, it sounds like, let's say, a $6 million in total orders.

I mean, is that 10 to 13 compressors?

Or how I should I look at it?

It's a -- I won't give you a whole lot of details from a competitive standpoint.

But it's a varying mix of -- it's over 10 compressors and it's varying mix of horsepowers, all the way from 200 up to 1,300, 1.400 horsepower per compressor.

So as I mentioned, the smaller size we do in our sleep almost, the bigger ones we've done before, we typically do them in the Tulsa or Midland shops.

But we haven't had a whole lot of those bigger horsepower unit orders in a while.

So that's kind of encouraging for the point that the smaller horsepower typical, big horsepowers -- a little newer profile that we're seeing going forward and a couple of things.

I think this order, we do have some potential for expanding the order over time, certainly depending on what the activity on oil price is.

But also this significant piece of it being large horsepower kind of opens up some additional opportunities, too, I think.

Yes.

Did you mention what portion of your sales, I might have missed it, is international?

And was this order an international order?

No, this was a domestic order.

And in Q1, probably, I would -- I estimate probably 2/3 of that was order was international -- I mean, of that quarter -- of the first quarter this year was international.

But this new order is all domestic.

And the last one on that.

If it's a domestic order, is it with a rental customer more than likely, too?

It's with -- yes, it's with a -- yes, it's a good customer of ours.

We've dealt with them a long time, we rent and sell and everything else with them.

Okay.

And last one for me is a great commentary on uncompleted wells, too, and then you mentioned some infrastructure issues.

Is it -- I mean, is that a meaningful issue in terms of lack of pipeline takeaway capacity?

There's -- it kind of depends on who you read and who you talk to, right, and the areas you're in.

I think in the Permian, in the Delaware basin, within most active plays, there's more pipeline constraints in some of that.

Now you can go to different parts in the Permian and in the U.S. Parts of Marcellus still have some takeaway issues and parts that don't.

So yes, it can be spotty even within basins.

But generally, I think the take-off and the additional production has caused us some of that.

The main reason I wanted to kind of -- we missed that, number one.

I think as these issues mitigate or work out over time, we ought to see more production coming online.

Now obviously, that's a double-edged sword, what does production do with pricing, et cetera.

But from -- the thing we've been watching is when we enter this 6- to 9-month typical lag.

Okay, well, when's this lag going to end and what are the particulars that are causing it now because we're on the -- in the transition, hopefully, from a downturn to some more activity.

So there's some different things in every upturn and downturn that impact, and so you get some of these infrastructure issues.

But actually, one of the big ones being just frac crews.

All the fracturing guys are busy and things like that.

So you get a lot of factors that impinge on our timing on participating in these upturns.

But again, depending on when you take the beginning month and countdown 9 months, somewhere in the second half is where we think we ought to be seeing some additional production from some of these factors that have been impacting us at this point.

Our next question comes from Rob Brown from Lake Street Capital.

I just wanted to touch a little bit on pricing trends.

Did you note that they -- have they worsened or they've stabilized?

Or maybe just what's the trend line in pricing as things are going here in the first half?

Yes, I don't think they've worsened.

But they haven't gotten better, and they were bad.

So that means we're still fighting a lot of pricing.

And there's been kind of some interesting reports and analyses and articles on pricing issues because this pricing thing is not an equal-opportunity provider.

You see certainly some of the pressure pumping companies going up in price, frac, sand companies and things like that, and you read about that stuff.

The outlook's good and well.

But you start reading about some other portions of the business, and it's not.

And ours hadn't seen it.

I think some of the pipe outfitting companies or the distribution companies haven't seen it, things like that.

So it's a pretty spotty recovery right now.

It's -- just like I mentioned before in the productions -- the actual production piece of it, that's fairly spotty due to different impacts.

Price is pretty spotty, too.

But from our standpoint, yes, we haven't seen really any improvement on the pricing at this point.

And it's -- still a lot of equipment out there.

And I think as I mentioned in the past, we've got -- a lot of our competitors are pretty cash constrained, and cash is -- they're driving no matter how much it is.

Okay, good.

And then on the equipment business, is there shift to more equipment purchasing rather than rentals?

Or is this just a one-off sort of customer growth situation?

No.

No more than usual.

This is just -- as I said, it's a customer we've dealt with for a long time.

We've done a lot of work for them.

And we've sold them some equipment in the past, and we currently rent them some equipment.

But it's -- they -- with this recovery, they've seen lot more opportunities come up.

They're starting to build out their piece of their world, and we were fortunate enough to start pushing some of the bigger horsepower capabilities we have, in addition to -- you're already aware of the small horsepower stuff.

So we were fortunate enough to get the order.

Okay, great.

And then just quickly on the VRU market, how is that trending?

And have you seen that pick up?

Or is that still trending with the rest of the business?

It's still positive.

We're still building some VRUs and putting them out.

I think like everything else, we're not going to see a -- anything impressive in that till the whole market starts to pick up.

But certainly, VRUs and the higher horsepower models we came out with the last couple of years will be the bright spots in the whole fleet.

But the core fleet is one that's still under pressure a bit.

Our next question comes from Peter Van Roden from Spitfire Capital.

First question is on the equipment sales part of the business.

So you mentioned, based off from what you've done so far and the backlog that you have, you're expecting kind of $14 million of compressor sales.

What was -- what's the other portion of the sales business?

What was that in 2016?

And can you give us an outlook for 2017?

In 2016, I think that was around $2 million to $3 million.

Hold on, one sec.

Yes, it consists of flares and parts and overhauls, stuff like that.

Well, oh here we go.

Okay, in '16 full year, compressor sales, $10 million.

Total sales, about $13.5 million.

And I don't want to hazard a guess as to what the balance of that might be for '17.

We have seen -- flares really aren't growing.

There's kind of a stagnant or static market.

We've seen a little parts pick up, things like that.

So I would expect us to probably have about the same differential.

But as -- that's not a promise right now.

Yes.

Okay, that makes sense.

And then I'm curious to get a little bit more perspective on the contract signed part of it.

And so I think that your business is fairly quick-turn so you send a contract and the compressor goes out fairly quickly.

But is -- are some of these contracts that you're signing a little longer dated?

So these are guys who are completing wells, working through giving them on production and then they're anticipating compressor needs in the third and fourth quarters so you have a little bit more visibility into the second half than you've had in previous years?

No, we don't -- there's nothing like that going on right now.

Now as things pick up, maybe we'll see a little more of that when we did the last upturn in 2010, '11.

But right now, there's so much equipment in the market.

They don't really have to worry too much about finding a compressor unit even if it's 2 or 3 weeks down the road.

So you're not getting anybody really signed up for the future because they're concerned about getting the equipment.

There's plenty of it out there and people can deliver pretty fast.

So we don't see any of that.

We do know of projects that we've been slated to get that we haven't received yet.

We're aware of those, but it's not a situation of signing up and then -- for future deliveries.

Got it, okay.

And then final question.

Obviously, you get this probably once in a quarter, but the cash balance has now gotten to a point where, I mean, it's 25% of your market cap.

And given the cash generation of the business, I just can't see you needing all of this cash forever.

So what are your thoughts on what you'd like to do with it?

Yes.

Well, as I mentioned, and you're right, at least once a quarter.

It's usually more.

And as I've said in the past, there's a couple things we can do with it from a shareholder standpoint.

And we're still evaluating that.

But another factor that's come into play now is if we are in the beginning of the bottoming or the turning or whatever it might be, we're starting to look at what that CapEx requirement may be in the future.

Now your immediate question is, wait a minute, are you going to really need a whole lot?

We're not going to need a whole lot of CapEx for our core rental fleet.

The 100- to 300-horsepower equipment, as you know, we've got plenty of it.

And we don't -- I don't know if I mentioned it on the call or I mentioned it that in the next couple of years, approximately, I don't think we'll be spending a whole lot of capital in the core piece of the business because we've got equipment we can put out.

But when you start looking at this bigger horsepower stuff, the 400- and 600-horsepower units, and again, we're sold out of those and we're building some more.

It's not a real big number now.

But I anticipate that taking off in the upturn, like everything else.

And we don't have any of that equipment.

So that is, as I mentioned in the past, where most of our CapEx will go.

If you start looking at $0.5 million a unit, 30 of those units are $15 million.

60 is $30 million, et cetera.

So it wouldn't take a tremendous boom to start spending an appreciable amount of capital on that type of equipment alone.

It's 2 to 3x as much per unit is what we've done in the past.

So we're starting to consider that, too, in our planning.

But -- and I think we have very strong cash generation this quarter.

I mentioned that $10 million is extraordinarily strong.

We haven't had a quarter like that from a cash flow standpoint in the last -- certainly, last year, or maybe even longer.

So kind of an anomaly, a little, that the cash flow is that strong, and I mentioned the reasons.

It will [TAM] down a little.

But you're right, we do have $74 million.

But these are the things we're trying to look at.

And certainly, now what's coming into the picture is our projection for the bigger horsepower stuff now.

Got it.

And then a final question.

If you read the, I guess, the big oil field services transcripts, all of them are touting kind of bigger wells, bigger laterals, everything's just bigger.

And so does that, in any way, impact -- I mean, does -- I guess, I mean, doing bigger compressors.

But do you think the -- a recovery will still be -- your lower -- I guess, what I'm trying to ask is your horsepower units will still be needed in any type of recovery?

Yes.

Because you start out -- certainly, bigger's better, right?

And that's one of the reasons we've moved into this 400 to 600 horse.

Also is to take advantage of that piece of the market in addition to pad drilling, centralized facilities, and everything else, all that drives more horsepower, more gas volumes.

So the 400 to 600 horses are going to help us participate in that market there.

As far as our smaller equipment, when you started with 600 horse, within a year, you're going to 400 or 300 horse; and then a year, you're going to a 300 or 200 horse.

So you constantly got this step down requirement over the life of a well.

So all we're doing, we're not eliminating any of what we've got.

We're just stretching into the market we haven't been, and we'll still maintain where we are.

And even when you have centralized facilities and pad drilling and things like that, you're still needing smaller equipment because not everything's centralized, not everything's pad drilled.

You get other issues, just commingling of streams and things like that.

You're going to always need a smaller horsepower.

But with us moving to bigger horsepower now, the smaller horsepower is -- over time, is going to get to be smaller and smaller component of the fleet.

So they're going to be larger -- the smaller and smaller component.

So we think that, certainly, the moving to a bigger horsepower is the right move.

We think it's good move.

But it's not, by any stretch, abandoning who we are.

And the market will need this stuff going forward, always has.

Our next question comes from Mark Brown from Seaport Global.

I just wanted to see if you could give kind of an update on the regulatory changes.

I think a couple of years ago, we were talking about the Quad O regulations going into effect.

And maybe you could give kind of an update on that.

And just also the EPA proposals to pare back some of the existing regulations that limit methane emissions for the oil and gas industry, if that has any potential impact on your compression business.

Right.

Well, Quad O was -- I think it's 2012 that it was effective, so it's almost 5 years old now.

I don't think we're going to see any change in that regulation.

If there is, it's going to be around the edges.

That one's pretty well in.

It's established.

It's part of the fabric of operating.

Operators have gotten used to it, and that's what's driving our VRU business.

So I think you've got that pretty well intact.

It would be hard for this administration to go back and undo a regulation that's that old.

Now you get the Quad Oa.

So 4 Os and an a now, which is the methane capture stuff.

I think that one is probably going to either go away or be stripped down quite a bit.

You read more and more.

I mean, certainly, the EPA's already put it under review.

And this is one, from our standpoint -- of course, from a drilling and fracturing standpoint, there's -- you got to go to green completions, closed loop, stuff like this so you don't -- you're.

Not doing open airflow bags and things like that.

So there's certainly an impact on that part of the business.

As far as our part of the business, the big issue was called LDAR, leak detection and repair, which was -- and as you all know, I'm not a big fan of EPA to start with.

But this is really on onerous regulation where you had to go out and check every potential leak point.

And a potential leak point is a bolted flange.

Well, yes, anything might leak but it never does.

So I was getting down to being kind of silly.

I think that one is probably under potential attack, and I think it should be.

I don't think anybody gains anything out of that one.

So I think, you got a mixed bag.

The older stuff, I think is here to stay, and it's already established.

Everybody's used to it.

The newer stuff, I think, is probably subject to change.

Okay.

And I just wanted to ask on -- more on a macro level.

What sort of natural gas price would we need to see to get a real -- to really stimulate drilling and ultimately production that would really take the compression business as a real accelerant to the growth?

Is there sort of a natural gas price that we would think about that would be that inflection point?

I think you have to have -- and again, price being one thing, stability of the price being another, just as important.

I think you have to have a price that's consistently above $3.50.

The problem is -- I mean, you get spikes up to $3.50, $3.40 or whatever it is, and everybody knows it's a spike because it tends to come off.

Some of it's seasonal.

Some of it is just supply and demand.

But there's -- the problems you got with gas right now is there's just so much gas.

And if it's in the market, that's one thing.

But there a lot of gas still underground.

I mean, the Marcellus, you can drill a well out there and it comes in 10 million, 15 million cubic feet a day with no compression required or anything else.

And then, with the oil recovery, we're going to see more associated gas come on.

That's what caught us in the last downturn.

Coming out of '09, everybody thought that gas can't stay down this low.

But nobody thought about this associated gas in oil wells, and I think that's the other thing that's going to impact gas going forward.

The strength of the recovery, how many oil wells are drilled and then associated gas profile from those.

So I think the associated gas from Marcellus were the negative factors in the gas pricing scenario.

Obviously, positive factors are LNG.

And there seems to be -- certainly got a couple of plants online now.

This administration looks to be ready to approve more and maybe even lighten up the regulation on some of that stuff.

So it's a mixed bag.

And you get -- any day, you find an article one way or the other.

But I think you got have 3.5 plus consistently before we start to see some steady increase in gas drilling -- just gas well drilling.

Yes, it makes sense.

You need to really get that stable consistency and not just at a point in time.

So I appreciate it, Steve.

That's all I have.

Our next question comes from Craig Hoagland from Anderson Hoagland.

I wanted to ask a question that was related to one earlier about well productivity trends.

And sort of the ratio of drilling rigs to ultimately compression units.

And if the rig count is going to produce more oil and associated gas with fewer rigs, what does that say about the need for compression equipment if it sells?

Well -- Sorry I didn't mean to interrupt you, Craig.

No, no.

That's it.

Okay, all right.

There's never been a good correlation between rig count and compression required, and that's getting even worse now.

So it's been bad and it's getting worse.

The problem is, just like we're seeing -- I mean, rigs don't even -- they're getting disconnected from predicting production.

One of the reasons I mentioned is these [ducks].

You have rigs drilling wells, but they're not completed.

It doesn't impact production anywhere.

That's just one thing.

Of course, you're seeing tremendous rig efficiencies, crew efficiencies and things like that to come on.

So I think last year, it was Halliburton on one of the calls, said the 900 is the new 2,000, right?

It's going to take 900 rigs to do what 2,000 before.

So you're getting a pretty loose association between rigs and any sort of production.

And rigs and compression, like I said, has always been bad.

It's -- I think, it's almost falling now to even try to correlate something.

You can always correlate something, right?

It depends on what the R^2 is.

So I don't think we can use the rig count to determine that.

And that's one of the reasons I kind of went into some of these macro factors in my remarks.

And that we're sitting here, well gosh, these rigs are going up, and this is happening and that's happening and when's my turn?

And you start diving into this stuff, and you see why there's still delay in some of this stuff.

It's just not translating into a whole lot of production yet.

Right.

Would you think that amount of the compression equipment will correlate better with production then than with the number of rigs to create that production?

Yes.

That would be the closer indicator, just how much gas is flowing through the system.

Now again, I think you can just use gas volumes to some plot.

But you just -- you got to be a little careful with some of that, too, because not all -- not every well needs a compressor.

And some wells don't need them for a long time, some of them need them right away, and things like that.

So it's real hard to get a, what I would say, a reliable indicator.

Everything's going to be pretty general and more directional than quantitative.

Right, okay.

But when you think about putting the fleet back to work and these new high horsepower units in, do you think of that primarily being driven by associated gas or by dry gas wells?

I think associated gas.

I mean, that's the activity now.

We'll see some dry gas activity, I think out of the Marcellus as we go.

But the majority of this is it's just going to be an oil-driven recovery, and the associated gas is what we're looking for.

Right, okay.

Then last question.

The last time we went -- we had a dip in utilization or in recovery, I think there was a bit of surprise for The Street in terms of the costs associated with putting rigs back out.

I guess, it's basically a refurbishment cost or a preparation for the field.

Would you expect that dynamic to be the same this time around?

Yes.

We're always going to have -- I mean, just like everybody else, you hear the pressure pumpers talk about how they're -- overhaul and refurbishing their fleets before they go out.

Same thing with compression.

When we get a unit back right now, we don't do anything to it because we don't know when it might go out on contract.

So it's preserved.

It's put in the yard, and it waits for the next job.

Now when we get a job up, we go through and spend money on it.

And we're doing that right now, just not a high volume of it.

But as the churn goes above 1 as utilization starts to climb, we'll be putting more equipment out than we're getting back.

And you'll start seeing price pressure from that standpoint.

And that's what we saw in the last upturn, margins dropped into the high 50s.

Still not a bad margin.

But there was some margin compression due to that expense.

Now obviously the good thing is there's revenue behind that expense.

But we will see the same dynamic.

Our next question comes from Jason Wangler from Wunderlich.

I will -- my cash question got asked so I guess I'll have to find something else to bother you about.

Actually, I wanted to just ask, you talk about the larger units.

As you looked at your manufacturing facilities, would that change anything in terms of your throughput or even just on the ordering of parts as you look at thinking that the larger units will be kind of more in-demand going forward?

Would that change anything from kind of your -- getting those units out to the market, outside of the additional cost?

If you had a -- say you just had a tremendous explosion on the upside of big horsepower units, you'd obviously run to some constraints because those units take up more space.

They take a longer time to build, and things like that.

If you go back to 2014, we ran 320 rental compressors to both our shops, Tulsa and Midland.

So almost 1 a day.

So if you got these bigger ones, you probably cut that roughly in half, say.

But number one, the market isn't as big.

The market is about half as big, again, from a unit standpoint.

Now we think the revenue is about the same.

So that would fall in line.

That would correct itself a little.

And you're probably not going to have that -- certainly, in the interim period as we're moving into this market, you won't have that kind of volume starting out.

But it's not a -- obviously, a good problem to have.

But I'm not worried about being able to keep up with that.

The other thing we've got the ability to do is Tulsa has typically been our -- historically, our build shop.

And Midland has been our rental shop.

But we've got the ability to go back and forth.

So if we see more rental, bigger horsepower rental units coming up, we've got the opportunity to ship maybe some to Tulsa or things like that.

So we've got some flexibility that we can do it in advance of anything outstripping our capability.

Right.

And I know it's kind of a -- it would be a good problem to get to at some point.

In -- I guess just in the same ilk, as you looked at -- you've always talked about kind of having a pretty uniform fleet and everything.

And then obviously, you're just larger, but I believe that they're predominantly the same type of units.

Would that change anything in the manufacturing terms of if you wanted to make a set amount of 400, a set amount of 600s or a different array of units or is that pretty much plug-and-play just based on what you need to get out for customers?

Well, this being a rental stuff, if we see the needs going up or accelerating, we'll go ahead and start putting our capital budget and schedules, additional equipment just like we're doing now at a lower level.

We're sold out as we're building some more.

And you do get better -- I mean, there's a real learning curve on building 1 compressor versus building 10 or 20.

It costs better with that.

And so we prefer to do it in bulk versus 1 or 2. We'll do it according to what the market tells us.

But if you can do volume, you're a lot better off in a lot of ways, from cost, from scheduling, throughput, everything.

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

Okay.

Thank you, Erica.

Thank you, Alicia, and thank you everyone for joining me on this call.

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

Thanks.

This concludes today's conference call.

Thank you for attending.