Natural Gas Services Group Inc (NGS) 2018 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'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 statements 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 the 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?

Thank you, Alicia and Erica, and good morning.

And welcome to Natural Gas Services Group's Fourth Quarter 2018 Earnings Review.

This morning, we reported fourth quarter 2018 results, and we are pleased with our operational performance in the fourth quarter of the year, driven by strong sequential rental revenue growth of 7% in the quarter.

While our growth included continued progress in our high-horsepower category, the majority of the rental revenue growth in the quarter was a result of solid performance from our core mid-horsepower fleet.

Sales revenue declined by about $1 million sequentially, primarily the result of our decision to reallocate production plant resources to higher margin rental fabrication, thereby reducing the opportunities for sales revenue.

However, our sales backlog at the end of the fourth quarter was at its highest level since the third quarter of 2017.

We did have a nonrecurring expense this quarter of little over $0.01 per common share related to potential strategic growth initiatives, but our margins were generally higher in the quarter, which sets the stage for solid performance for the company in the coming year.

I'll provide more details as we review our financial results.

So looking at total revenue, NGS reported total revenue of $16.2 million for the fourth quarter of 2018, a 3% decrease compared to the same quarter of 2017.

The decrease was primarily driven by decrease of sales, the magnitude of which is largely offset by an increase in rental revenue.

From a rental perspective, we had 102 more units running in the fourth quarter 2018 than the same period of 2017.

Total revenue decreased slightly by 1% when compared to the third quarter of 2018 due to the timing of sales revenue from compressor sales.

However, the decrease is partially offset by a 7% sequential increase in rental revenue for the fourth quarter of 2018.

Total adjusted gross margin for the 3 months ended December 31, 2018 increased to $8.2 million from $7.9 million for the same period ended December 31, 2017.

Adjusted gross margin, which does not include depreciation, as a percentage of revenue for the 3 months ended December 31, 2018 was 51%, an increase from 47% for the comparable period of 2017.

Sequentially, adjusted gross margin increased from $7.8 million in the previous quarter of 2018.

Adjusted gross margin as a percentage of revenue increased to 51% for the 3 months ended December 31, 2018 compared to 48% in the previous quarter.

The increase in the adjusted gross margin as a percentage of revenue can be attributed to higher gross margin in our rental business, and a slight mix shift towards higher margin rentals this quarter.

Selling, general and administrative expenses were $2.4 million, remained relatively flat for the year-over-year and sequential quarters, but was down 10% in the full year comparative periods.

As mentioned, we did have a nonrecurring expense in the fourth quarter of over $160,000 or over $0.01 per share due to potential growth initiatives.

Operating income was $106,000 in the fourth quarter compared to breakeven in the third quarter and an operating income of approximately $220,000 in the fourth quarter of 2017.

Our operating income, while positive, is fluctuating more than usual in the comparative periods due to nominally lower total revenues, caused by lower sales revenues, again due to the rental unit revenue displacement.

Higher depreciation expense is due to larger horsepower units being placed into service as they're fabricated and variability in SG&A expenses.

We continue to experience some anomaly between our deployment of higher horsepower and lower corresponding revenues and income.

This is almost totally due to the timing differences between deployment of the equipment and the receipt of full rental revenues and associated income.

The variation being caused by scheduling, commissioning and start-up activities that take place after the units were built.

To demonstrate this, almost 80% of our growth in high-horsepower rental revenue in 2018 was consumed by increased depreciation.

Additionally, due to varied commissioning schedules, only 80% of the full rent on the deployed high-horsepower fee is being collected right now.

These are timing delays and not permanent delays and a natural phenomenon of moving into a new market that entails such high capital costs and longer start-up cycles.

The good news here is that we're beginning to place more high-horsepower equipment every quarter, which should have a positive effect on the aforementioned variability in revenue and income gains.

Looking at net income.

Due to a noncash adjustment for income tax expense related to executive compensation, we reported a net loss of $282,000 for the 3 months ended December 31, 2018 compared to net income of $18.7 million for the same period in 2017.

Excluding the tax adjustment expense, net income for the period was $351,000.

Excluding the $18.4 million tax benefit from the 2017 Tax Act in the fourth quarter last year, our adjusted net income for the 3 months ended December 31, 2017 was flat at $352,000.

Sequentially, we had adjusted net income of $351,000 in the fourth quarter 2018 compared to net income of $236,000 in the third quarter of 2018.

For the fourth quarter 2018, the company posted a loss per diluted share of $0.02 compared to $1.42 in 2017.

Excluding the noncash income tax adjustment in the fourth quarter, earnings would have been $0.03 per diluted share.

Excluding the fourth quarter 2017 tax benefit, year-over-year quarterly earnings were flat.

Sequentially, diluted earnings per share decreased $0.04; however, excluding the income tax adjustment expense, earnings per diluted share increased $0.01.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, for the 3 months ended December 31, 2018 was $5.8 million, a slight increase from $5.6 million for the same period in 2017 and $5.7 million for the third quarter of 2018.

EBITDA margins have roughly averaged about 35% of revenue in all comparative periods.

Total sales revenue, which includes compressors, flares and aftermarket activities, can be somewhat unpredictable and can cause considerable swings period to period.

The uncertainty of this somewhat unpredictable nature of sales revenues can depend on the market and customer preference, which oftentimes changes period to period.

On a year-over-year basis, NGS sales revenue decreased by $2 million to $2.9 million for the fourth quarter 2018.

The revenue drop was primarily due to a decrease in parts sales when compared to a large parts order in the fourth quarter 2017, but we also saw compressor and flare sales off in that quarter too.

When comparing to the previous quarter, total sales revenue fell by $1 million, primarily due to a shift in compressor sales revenues due to the allocation of a large part of our fabrication floorspace to contracted rental fabrication.

Compressor sales revenues of $1.5 million for the fourth quarter of 2018 were down slightly year-over-year from $2.1 million.

The sequential quarter's sales decreased from $2.9 million in the third quarter of this year to $1.5 million this current quarter, with about $1 million of that sales decline due to the aforementioned fabrication space reallocation.

Fourth quarter 2018 total sales gross margin as a percent of revenue was 20% compared to 22% in the third quarter 2018 and 21% a year ago.

There can be quite a bit of margin variation period-to-period in our sales business due to scheduling and bidding, but significantly gross margins for the year averaged 23% compared to 19% for the same time period in 2017.

Our sales backlog as of December 31, 2018 was approximately $14 million.

This compares to sales backlogs of approximately $8 million in Q1, $4 million in Q2 and $13 million in Q3 of 2018.

This is the highest backlog we've had since the third quarter of 2017.

We continue to be pleased with our rental results, with rental revenue of $12.8 million for the fourth quarter of 2018 and increased sequentially year-over-year and for the full year 2018 compared to 2017.

Additionally, rental revenue in the fourth quarter of 2018 was the highest since the fourth quarter of 2016.

The full year 2018 versus 2017 rental revenue increased 4%.

Year-over-year, quarterly rentals increased 12%.

And with sequential quarterly rental revenues increasing 7%, we've seen an acceleration in recent rental revenue growth.

We continue to expand our large horsepower presence, and received an additional order in January that represents approximately $17 million in CapEx.

This order, in addition to the large order I mentioned on the last call, will keep our fabrication shops full through the first quarter of 2020.

Last call I mentioned that we were going to build 12 large horsepower speculative units in 2019.

All of those have now been contracted in advance of their build.

We do, however, plan to build more spec units towards the end of this year and into 2020.

At December 30, 2018, a full 18% of our utilized horsepower is classified as large horsepower.

This is a significant shift in our fleet makeup and demonstrates, I think, the strategic direction we chose a couple years ago was the correct one.

To keep up with what we think will be continued growth in large horsepower market, we have secured additional fabrication space.

Compared to the third quarter 2018, average rental rates on a per-unit basis increased 3% or essentially flat on an average per horsepower basis.

Rental gross margins this quarter were 57% and increased from the third quarter rental gross margin of 55%, but marginally down from last year's quarter of 58%.

Fleet size at the end of December totaled 2,572 compressors, an addition of 6 units or almost 5,000 horsepower in the fourth quarter.

Over the past 12 months, we have added 31 new fleet units that totaled 29,500 horsepower, with 99% of that being in our large horsepower category.

This represents an increase of 8% in total fleet horsepower.

Our rented horsepower has increased 25%.

Our utilization as measured by horsepower climbed from 55% last quarter to 58% this quarter, while unit-based utilization grew from 52% to 53% this quarter.

We saw an increase in rental units utilized at quarter-end of 8% year-over-year and 3% sequentially, while our horsepower running in the field increased 25% year-over-year and 6% sequentially.

We started 2018 with a rental compression CapEx estimate of $20 million to $25 million.

In the last quarter, I raised that to $30 million and that is right where we ended the year at.

Of that $30 million, approximately 95% has been contracted.

Based on the additional higher horsepower business we -- that we have a direct line of sight of, we estimate our 2019 rental compression CapEx to be in the range of $37.5 million to $40 million.

Of this, almost 99% is already contracted.

Moving to the balance sheet, our total bank debt is $417,000 as of December 31, 2018 and our cash balance remained strong at just over $53 million.

This amount is down about $16 million since the beginning of 2018, with a vast majority of the cash being invested in our new high-horsepower rental compression equipment and our new corporate office.

Positive net cash flow from operating activities was $23.4 million for 2018 compared to $17.5 million in 2017, a 34% increase in cash flow.

Overall, we're pleased with our fourth quarter and 2018 results, especially given the volatile market environment in which we operate.

We continue to have one of the strongest balance sheets in the industry, which provides a significant competitive advantage as we evaluate both intrinsic and extrinsic growth opportunities.

As we've said before, we'll be patient and disciplined in evaluating opportunities but will not be afraid to make meaningful commitments for the right opportunities.

We continue to believe we have the right tools and flexibility in place to take advantage of compelling opportunities.

We continue our conservative focus on managing capital, which has also served us well.

Since 2010, we have self-funded over $230 million in capital equipment, nearly 95% of which is additions to our rental compression fleet.

Moreover, approximately 95% of the capital we are currently spending is for equipment backed by long-term contracts at above-market rates with solid counterparties.

While we are certain that volatility in commodity markets will continue, we're also confident that 2019 is looking to be a solid year for Natural Gas Services Group.

Forecasts suggest that completions will continue to grow in key resource plays, which will require additional compression horsepower.

Our existing contracts for new compression, including continued growth in our high-horsepower offerings, support our optimistic growth outlook for the coming year.

All in all, we are pleased with our performance in 2018 and enthusiastic about our prospects in the coming months, especially given our strong start to the year.

That's the end of my prepared remarks.

So please open the lines for any questions.

(Operator Instructions) Our first question comes from Rob Brown from Lake Street Capital.

Just wanted to get a little more color on the high-horsepower demand environment.

Are you seeing that accelerate from kind of earlier in the year, or is it a matter of you are now taking on more kind of yourself and the market is about the same and still strong?

I don't -- I guess it's accelerating a little.

Certainly, the market is strong, and I think we're making pretty good market penetration into -- just a couple of years ago, we didn't have any of this horsepower.

And now we're up to about 8% of the fleet and 18% of the utilized horsepower is big.

So I don't think it's accelerating as much as we're capturing more of that market as we go.

And as I mentioned, we're booked for the next 4, 5 quarters in our shops, and we've even secured additional space to try to add more speculative units and more anticipate contracting the units too.

So accelerating maybe, but I think it's certainly staying solid and we've grabbed some good contracts in the last couple of quarters that we've announced, and yes, those are what are keeping us busy, certainly from the high-horsepower over the next year.

Okay.

And I may have missed it, how many -- on this new contract, how many units did you win?

I think you said $17 million in CapEx, but how many units is that?

You didn't miss it because I didn't say it.

That's fair enough.

13 or 14 units.

It's all -- they're bigger units, the 1400 horsepower units.

Okay.

Good.

And then I think you talked about adding -- are you adding capacity or did you find third-party capacity to build those units?

We're actually outsourcing some of it.

We went out, looked at the market and we've been working on all the things for about 6 months, and we've secured what we think is a premier fabricator to work with us and we're going to do up to our capacity and let them do some of the peak shaving part of it.

Okay.

Good.

And then last question on the kind of the non-high-horsepower market.

It sounds like that's recovering a little bit as well.

How are the trends there, and what kind of utilization improvements do you kind of see, how does that raise that sort of 1 or 2 points a quarter kind of improvement?

The high -- the horsepower utilization went up 3 points and the unit utilization went up 1 point.

That's normal with this bigger horsepower.

The horsepower climbed faster than the units.

So I anticipate that kind of staying the same.

Maybe see 1 or 2 points in the unit utilization and then 2 or 3 in the horsepower utilization.

And it's hard to say.

I mean, these quarters fluctuate and vary so much.

But we've still got a pretty good rental backlog.

The makereadies are still building.

That medium horsepower range, which is essentially gas -- wellhead gas lift compression, is starting to pick up.

It's been decent for about a year, but there's been so many properties changed in the market.

And typically larger companies selling off what they consider as more mature properties.

So you always get some shifting of equipment in deals like that.

And typically, there's more optimization going on when those properties are sold to smaller guys, et cetera, et cetera.

So although we sent a lot of equipment, probably the first half of the year, we got a fair amount back, although we've had about 3 or 4 quarters of growing -- net growth in that segment.

So I think it's going to stay good.

We've been kind of waiting for it and we've frankly probably lagged the market a little on that just like our utilization has, but that's primarily due to us maintaining our pricing more than what we think the competitive landscape has or the competitors have.

We didn't go down as low on pricing.

You tend to give up some share on that in a downturn, which we knew and we were okay with because we kept generating EPS, and the operating results were good.

So I think we're now into the point that we've seen the pricing -- general pricing come up in the market, that makes our pricing a little more attractive on a relative basis, and certainly, we have a good service reputation out there.

So all that, I think, is combined to now start perking up that mid-horsepower.

And I've missed this in the last 2 or 3 quarters if we -- obviously, the big horsepower is growing and growing quite well.

And that's where all of our CapEx is going.

But once we can get this mid-horsepower starting to move, that's a no-CapEx growth story, which is great.

So returns start to really pile up on that and it can really get pretty good.

So we think that mid-horsepower is starting to come into its own from our perspective and anticipate it continuing that way.

Our next question comes from Tate Sullivan.

You mentioned 80% of your full higher-horsepower rental revenues being collected.

I know it depends on the location for those high HP units, but what is the average time line from deploying that to start collecting the full rental revenue?

It goes from 3 to 6 months, typically.

So once you build the stuff, and if you aren't familiar with this, this is big stuff.

I mean, the skid itself weighs -- the engine and compression cooler is 175,000 pounds.

It's very expensive to move them, very expensive to install them, takes a lot of time.

There is more construction and not just on site from the operator, but there's more fitting up on our end between all the piping there on those units.

So it's a pretty big production.

And we knew that going in, that's what's you get in this market.

But you do have more money involved, longer cycles to get that coming in.

So that's what we're seeing.

The equipment we have out now, only about 80% of the full rent is being gathered right now and the other 20% is certainly in some form of scheduling, commissioning, start-up and stuff like that.

But you'll typically see a 3- to 6-month delay on any given unit once -- until you get full rent.

And the good thing about it is -- I mean, we'd rather have it day 1, right, obviously than 3 to 6 months later.

But our minimum terms don't start until the full rent starts.

So even though we may have some interim standby rents, we get full rent for the full term once the equipment starts.

So we're not giving up anything from the term standpoint when we're looking at these marginally lower rates for a little bit.

Okay.

In terms of the schedule of deploying previous orders into the field, I mean, is it every -- I mean, how consistent is the cadence that it's going out your doors, if you can share, or what does the potential delivery schedule look like for '19, if you can give any context?

Yes, I'd share it if I could pinpoint it.

It gets highly variable.

And certainly, we have a fabrication schedule on when this stuff is planned and what's happening and everything else and that schedule is subject to change at any time by the operator.

And not from the point of -- I mean yes, they may want to slide something this way, we might want to slide something that way and everything else.

So it's always in flux, but we've got -- I don't remember the exact number, but probably roughly 40 units going through the schedule over the next 4 quarters.

So if you just want to do a quick number, you can say well that's 10 a quarter and you got 3 to 6 months until you get revenue off of them.

I know that's a pretty wide -- if you calculate, that number has pretty wide variance, but that's probably as best as I can get.

Okay.

And one more from me and then I'll jump back in.

The press release mentioned strategic growth initiatives.

Was that based on securing additional fabrication space or is it something else?

No, it was -- actually, I'd say it's about $160,000 of equipment, little over $0.01 a share, which I want credit from all you all for.

But it's just we needed to hire some advisers to look at some external opportunities and we did that and we incurred that expense.

Our next question comes from Kyle May.

One quick one, just to get things going.

Can you say again what was the size of the rental compressor fleet at the end of the year?

Yes, let's see, 2,572.

Got it.

And one other thing I was curious about with the tax adjustment in the fourth quarter.

Can you give us any more color on what's going on there, and if that should be anything we need to be mindful of going forward?

No.

It's a onetime adjustment.

So it's not a recurring expense we'll have.

It's an expense the auditors required from a tax standpoint and over the -- and the problem with some of these is you've got to book them in the quarter, right?

So it may be over a longer period than a quarter, but it's booked in that quarter.

So it's just a onetime adjustment that the auditors required us to book, and so that's what we did.

Okay.

Got it.

And then maybe the last one from me.

As you're -- you're looking at -- over the last couple of quarters, you've talked about building some spec units, and it sounds like you're already making a lot of headway on getting those contracted.

Can you maybe talk about the environment that you're seeing with how long it takes to get those under contract and then maybe a little bit more on your thoughts for spec units in 2019?

It's not -- well, we had actually about 1 unit per month scheduled, I think I missed that on the last call.

So about 12 spec units scheduled for 2019 in addition to the other committed contracts we had.

We have 0 spec now because those 12 were taken, which is good, but now we got to try to build some more spec ones.

Right now, we're probably looking at another -- it's becoming dependent on shop space, that's why we look at going outside a little.

Right now, just roughly, we're probably looking at maybe 4 or 5 more at the end of the year and then into 2020, we haven't looked too much into that 2020 yet.

But I would hate to even venture a guess.

But if we just replicate what we're thinking for 2019 and do one more month in 2020, that's another 12 units, $13 million, $14 million in addition to any other contracts we think we might secure in the balance of 2019.

Now the issue everybody's got to remember is about June or July, anything we get contracted typically falls into the next year.

Because you've now got essentially 6-month deliveries on components, engines and compressors and things.

So even if you get a contract in June or July, it's not going to happen -- that revenue piece is not going to happen until 2020.

So -- and what is this, March -- so we're getting -- we got about 3 or 4 months to secure some more contracts for this year, which we don't have a whole lot of room for, and then the last half of the year, we'll start securing for 2020.

So to cut the answer short, roughly maybe 1 a month into the last quarter of this year and into 2020 in addition to anything else we secure.

Our next question comes from Richard Dearnley.

How many units did you rehab in the makeready bucket in the fourth quarter?

Was it about the 80, give or take, that you've been running?

No.

Hold on.

I've got -- I might have to give you that afterwards, but I thought I had all the answers I needed here.

Let's see.

We did about -- and I don't have the exact number, but we did about -- the expense ran about twice as much in the fourth quarter as it did in the third quarter, but I don't have the number of units.

If it -- so if the expense was more and you did twice and you did 82 in the third quarter.

Would that tell me you did 160-odd in the fourth quarter?

Yes, roughly.

That sounds -- it sounds like a high number.

I'll tell you what, I'll probably just need to dig into that a little more, but that rental backlog continues to be strong, I'll say that right now.

Right.

And the makereadies are largely in the mid-horsepower range, aren't they?

Yes, sir, yes, all the big horsepowers are brand-new.

As -- with my calculation, which is a bit of a guess, be about right that you only have about one more year of makeready units that you can makeready and then that inventory is used?

Yes, we've got for 53% utilized, we still got about 1,100 units.

You're probably right, if you're just talking about the mid-horsepower range, not including the small horsepower.

Yes, that market has, as I've mentioned before, just gotten flat.

So with the growth in the mid-horsepower market and that all being present fleet equipment that needs to be refurbished before it goes out, you might be right, it might be 1.5 years or something like that, it's hard to say exactly.

But it -- hopefully that mid-horsepower utilization keeps climbing the course.

One thing you got to remember is, when we say 53% fleet utilization, that's across our whole fleet, right, small, medium and large horsepower.

The large horsepower is 95%-plus utilized, the medium horsepower is getting into that 60% range and the smaller horsepower just kind of lays there at 40%, 45%.

So frankly, it's the small horsepower that kind of drags that overall utilization down.

Right.

I got -- I understand.

And then the third-party capacity.

It sounds like that's flexible, but how -- what kind of capacity does that feel like it adds?

Well, we think it can be significant if we need it.

The issue always, just like I mentioned, is long lead times on the equipment, the engines and compressors primarily.

So it is flexible to a degree, but you can't sit here in March and say, I want something in June because you don't have the parts and pieces.

And we've still got to order that stuff because they just fabricate, right?

So we order and ship it to them and then they do their thing in accordance with our specs.

So it's flexible as long as they're 6 or 7 months out.

Our next question comes from Jason Wangler.

Just wanted to ask on the pricing side.

You kind of mentioned it in the previous question, but with the utilization kind of taken higher, it sounds like you said maybe competitors pricing has started to kind of firm up a bit.

Just where do you see the kind of market going as that seemed to get better on the utilization side?

Yes, we've seen that.

Overall, the market is getting tighter.

Obviously, big horsepower is very tight, but even the medium stuff, we're starting to see tighten up a little too.

It depends on the model.

But what we've seen and this I kind of have to take a macro view of this a little, but as I mentioned, we didn't drop pricing as much in the downturn, we never do.

Our utilization suffers a little more than the general industry because of that.

And that's a typical phenomena.

We know it's going to happen.

We're okay with it.

So we didn't go down as much in pricing.

So -- everybody else went further.

So they've got to catch up some.

And so what we're seeing is that catch-up is, obviously, raising the general price in the industry, even though we're kind of staying where we are right now.

We're going to let everybody else catch up to us, at least closing the gap on us to your normal 5% to 10% premium.

And what we're seeing is as the market pricing comes up, we're getting more business because that gap is closing on that.

So [the saying is] it's great when a plan comes together, right?

So that's what we're seeing.

Just a general increase in the industry pricing.

We're able to kind of stay in where we were, because we're making profit at that point.

Now obviously, we're increasing some pricing on some models.

And just like we've done for years, we use utilization to gauge which models we can go up on and which ones we need to hold on.

So we've got to -- our pricing is more pinpoint where everybody else is a shotgun.

We see a lot of [folks who are going out there doing] 10% across the board or whatever.

But remember, most of our competition has lost money consistently throughout these downturns, and we haven't.

So that's the difference.

And we're able to hold in a little better right now, and I think that's why we're seeing some firming on mid-horsepower.

The pricing is coming close to ours and with our service, we're able to win more jobs.

Okay.

That's helpful.

And then on the sales backlog, just what's the timing on that, I guess, to finish that?

Are we talking rest of this year, is it 12 months or just kind of what we should be kind of thinking as you squeeze that into the fabrication side?

Yes, that $14 million will -- yes, it'll be probably a 3- to 4-month, I mean, 3- to 4-quarter backlog.

A lot of times it's quicker than that, but as I mentioned throughout, we've allocated more space to rental fabrication.

So we're being very particular of where we slot these sales units in because we, obviously, want these big horsepower rental units going out.

So I think it will be a 3 to 4 -- throughout the rest of this year essentially.

And hopefully, we add to it as we go too.

Our next question comes from Tate Sullivan.

Couple of quick follow-ups.

You mentioned medium horsepower going out the door is mostly gas lift.

Is that the same with the larger horsepower out the door, if you can comment?

Yes, the bigger units, and the difference is the medium horsepower is wellhead gas lift.

So you're gas lifting maybe 1 or 2 wells, and the big horsepower is more centralized gas lift, where you might be gas lifting 10 or 15 wells.

But it's essentially all gas lift is what we're building -- or deploying from our existing fleet.

Okay.

And a little preview of the 10k customer mix or any meaningful changes that you can highlight that are pretty consistent with previous years?

No, I think everybody -- I mean, we've increased our customer count, I was looking at that yesterday, from around, think about a year ago, 75 to 80, we're up to around 90, 95.

So the customer base is broadening back out.

Of course, in a downturn, it shrinks a little too.

So we're not setting any records on number of customers, but it is growing.

But no, I don't think there's any major shifts in customer concentration right now.

Our next question comes from Mike Urban.

So the -- with the outsourced fabrication capacity that you're layering in here, is that going to be primarily the rental stuff, the equipment sales?

Or is it more a function of production schedules and how that shapes up or it could be a little of both?

It's going to be -- right now, it's going to be primarily big horsepower.

The bigger 1,400 horsepower units.

Those are the ones that take up so much room and so much time that it really impacts the shop when you start putting those through.

So that's where we needed the most help.

We can fit in -- most of the sales are, say, medium horsepower.

So you can slot those in a little better, but the big ones take up -- I use disruptive in a positive manner, they're disruptive to a shop because they take up so much time and space that -- that's what we're looking to outsource primarily, just the bigger stuff.

Okay.

So then the stuff your equipment sale margin shouldn't really be impacted much.

I guess, that's where I was going.

I mean, obviously, you're going to have to pay these third parties something, so I guess just means, maybe slightly higher CapEx than you would have otherwise, but your equipment sale margin shouldn't be affected necessarily?

Right, right exactly.

We think the margins will stay in that 20% range.

So it means I think we're 20%, plus or minus 2% or 3% by quarter, and of course, that varies.

But -- and that's still generally the highest margin in the industry.

But yes, the outsourced stuff, we'll have to pay a little more, obviously.

But again remember, those are 3- to 5-year rentals, and we can absorb a little more cost on that and still look at good returns over the life.

Yes.

It makes sense.

And then I guess, one kind of housekeeping question.

I apologize if I missed it.

You gave us the units count at the end of the year.

What was the fleet horsepower at the end of the year?

I should have given you that, but I didn't.

I think it was around 390,000 or 395,000 horsepower.

I think that's -- I'm looking here in my other notes to see if -- I'm sure I've got it here somewhere, but -- okay, 398,765 horsepower, so almost 400,000 horsepower.

Okay.

Cool.

And then last one from me, the utilization of 58% on a horsepower basis, 53% on a unit basis, was that -- that's at the end of the year, right?

Yes, sir.

Our next question comes from Richard Dearnley.

Just a quickie for relative newbies.

Your comment about your sales are largely medium horsepower.

Could you talk about the economics of buying the medium versus renting the large?

Does renting -- the rent on the large since they're higher dollar go hand-in-hand with we want to be cash flow neutral is the new mantra or what's at work there?

Well, I mean, it's just simply what the customers order and how they want to get it.

It's -- we've sold big horsepower in the past and small and medium.

And right now, just the concentration has been primarily medium horsepower from the sale perspective, and of course, we're really pursuing on the rental market on the big.

So there's not really too much of an impact from one to the other.

It's really just what the customer wants and how they perceive their requirements.

The big horsepower rentals, those are getting pretty popular because number one, lots of capital involved in this stuff and an operator -- I tell operators this all the time, they're better off spending that capital on drilling the well than buying compression.

So that's important to them.

Bigger horsepower takes a lot more specialized technicians in the field and things like that.

So rental horsepower, big rental horsepower has become more popular.

And again, the medium stuff, we've got a lot of medium stuff rented, but sometimes people just want to buy it, so it just depends on how the orders come in, what they want to do.

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

Okay.

Thanks, Erica, and thanks everybody for joining on this call.

We look forward to a growing 2019.

I appreciate your time this morning.

We look forward to visiting with you again next quarter.

Thank you.

This concludes today's conference call.

Thank you for attending.