Natural Gas Services Group Inc (NGS) 2019 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; and Steve Taylor, Chairman, President and CEO.

I would now like to turn the call over to Ms. Dada. You may begin.

Thank you, Ross, and good morning, 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 of 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; their introduction of competing technologies by other companies; and new governmental safety, health or environmental regulations, which could require natural gas services group to make significant capital expenditures.

The forward-looking statements included in this conference call are made as of the date of this call, and Natural Gas Services undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to, factors described in our recent press release and also under the caption Risk Factors in the company's annual report on Form 10-K filed with the Securities and Exchange Commission.

Having all that stated, I will turn the call over to Steve Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?

Okay. Thank you, Alicia and Ross. Good morning, everyone, and welcome to Natural Gas Services Group's Fourth Quarter and Full Year 2019 Earnings Review.

Thank you for turning into the call. We filed our annual report on Form 10-K for the 12 months ended December 31, 2019, with the U.S. Securities and Exchange Commission after market closed on Tuesday, March 31, 2020. Additionally, we provided information on our fourth quarter 2019 results in a press release after the market closed yesterday.

Before I discuss our financial and operating results from 2019, I'd like to address the current challenges facing our communities and our industry. There's no doubt that the COVID-19 pandemic is having and will continue to have a meaningful impact on our business, our communities, our domestic and global economies.

While we remain focused on our business, it's in times like these that we must also focus on the building blocks of our company, our team members and their families, our customers and our communities.

Our team has done a remarkable job of remaining focused on the needs of our customers, while adapting to the new realities, such as social distancing, which have been presented by the pandemic.

We have a workforce that is varied in their functions, their professions and their locations, from the offices to the fabrication facilities to the front lines in the field, with locations from the Permian Basin to the Niobrara to the Marcellus as service teams consisted of multiple people to lone outposts.

Each has their own particular set of circumstances, and we continue to adapt to the short-term reality by transitioning to remote work plans and supporting our field service and fabrication team members on best practices to protect themselves from virus exposure.

We're focused on continuing our work in as safe and environment as possible. In this unprecedented health challenge, our goal is to establish protocols to protect our team, while at the same time, delivering -- continuing to deliver the exceptional service to our customers they have grown to expect from NGS. We're necessarily more deliberate in how we deliver that service, and it may not be as efficient as in our normal operating environments, but our effectiveness will not suffer.

As if this pandemic is not enough, the energy industry also faces economic challenges we have not seen in over generations. The combination of a flow supply from OPEC and Russia, combined with an unprecedented decline in demand resulting from the global pandemic and resulting economic shocks have caused oil field activity to plunge and demand for all oil field services to follow.

Never in my 4 decades in the oil field have I seen such a violent decline in price and oil field activities like we have seen in the last month. While I'd like to say I can see the proverbial light at the end of the tunnel, I do not think it will be that easy. We are likely to see more price weakness before the market begins to heal. What is obvious at this point is nobody's crystal ball is clear, and they are likely to remain blurred for the next several weeks and potentially months.

In short, 2020 is going to be a challenging year for our industry, either that will likely lead to significant company displacements, surprises that aren't yet predictable. And when we emerge from the abyss, a new normal that brings new efficiencies and operating disciplines to both producers and service providers.

In short, that's a descriptive way of saying we have very limited visibility into the balance of 2020, except to say, it will be challenging. That said, NGS is fortunate and that we have and consistently have had a strong balance sheet with free cash and we operate efficiently, although we will be expected to become even more efficient in the coming months.

We have solid customers who rely on our equipment services to produce hydrocarbons that create revenue. While I'm certain -- while I'm uncertain of the exact road map in the coming months, I'm confident that our team will work tirelessly to ensure customers and stakeholders are able to rely on NGS well into the future.

Despite continued volatility in energy markets and pressures on commodity prices, NGS continue to make progress in our core business during the fourth quarter of 2019.

Real revenue increased 6% sequentially and 19%, when compared to the fourth quarter of 2018. We are pleased with our full year 2019 adjusted EBITDA of $24 million, which increased 10% when compared to 2018.

Additionally, our operating cash flow increased to $29.4 million, an increase of 24% over 2018. We continue to have one of the strongest financial positions in the industry, with over $11 million of net cash on the balance sheet.

There's little doubt that we are operating in an environment with significant headwinds and an unprecedented level of uncertainty. The NGS team will continue to deliver best-in-class service to our long-term customers, who continue to needing -- need quality and reliable compression services. We will continue to focus on operating efficiently and use our existing contracts to generate cash.

With little short-term visibility for new projects, we expect total capital expenditures to decline at least 75% in 2020 from approximately $70 million in 2019. On March 13, 2020, we filed Form 12b-25, requesting an extension of time to file our annual report on Form 10-K, which we did the night before last.

In our extension, we indicated a number of compression make-ready jobs not been properly closed and recorded in a timely manner. Additionally, of those that had been closed correctly, there was an interpretive difference as to whether those expenses should be taken as incurred or amortized over time.

In deliberations with our auditors and to resolve the questions, we allocated additional operating costs and expenses of approximately $1.1 million in 2018 as well as the same amount for the first 9 months of 2019. These adjustments are reflected in the operating results we will discuss.

So with all that said, let's discuss the financial results as well as pertinent operating market comments.

NGS reported total revenue of $19.7 million for the fourth quarter of 2019, a 22% increase compared to the same quarter in 2018. We experienced an increase in our revenue stream for the 34% increase in sales revenues, 19% in rentals and 16% in service and maintenance when compared to the same quarter of 2018.

Sequentially, total revenue decreased by 5%. Rental revenues increased 6% sequentially, while sales revenues decreased due to a drop in compressor sales. In comparative year-to-date periods, our total revenues increased to approximately $13 million or 20%.

Total adjusted gross margin for the 3 months ended December 31, 2019, increased to $7.9 million from $7.6 million or 4% for the same period ended December 31, 2018. Adjusted gross margin, which does not include depreciation or various noncash nonrecurring items as a percentage of revenue for the 3 months ended December 31, 2019, was 40%, a decrease from 47% for the same period in 2018 due to higher rental costs, lower compressor sales margins and a $560,000 bad debt write-off.

Without the bad debt adjustment, our total adjusted gross margin would have increased to $8.5 million or 43% of revenue. Sequentially, adjusted gross margin for the fourth quarter of 2019 decreased from $9.6 to $7.9 million or 17% from the prior quarter. This is driven by lower sales revenues and margins, lower rental margins and a bad debt expense. Adjusted gross margin as a percentage of revenue decreased to 40% this quarter compared to 46% in the prior quarter.

Without the bad debt charge, adjusted gross margin would have fallen 11% quarter-to-quarter, as Dada just mentioned, 17%.

Selling, general and administrative expenses were $2.7 million, a year-over-year increase of approximately $330,000, and a decrease of approximately $50,000 sequentially. SG&A expenses for the full year and current quarter were $155,000 higher due to the previously announced stock vesting of our former Chief Financial Officer.

Our adjusted SG&A expenses generally run at 13% to 14% of total revenue and continue to do so. Adjusted operating income for the fourth quarter of 2019 was a loss of $880,000 compared to a $490,000 loss in the fourth quarter of 2018. The adjusted operating loss this quarter was due to higher depreciation expenses in our large horsepower equipment, higher SG&A and excludes an inventory allowance of approximately $408,000. Sequentially, adjusted operating income decreased $1.7 million, primarily due to lower compressor sales revenue and margins and lower rental margins.

Adjusted operating income for the full year 2019 was $156,000 compared to a loss of $507,000 in 2018. Adjusted net loss for this quarter was $1.4 million compared to an adjusted loss of $116,000 in last year's fourth quarter. Our third quarter 2019 adjusted net income was $967,000. Adjusted loss on earnings per diluted share was $0.11 for the fourth quarter, which compares to adjusted earnings per share of $0.07 since quarter and a $0.01 loss a year ago. Adjusted earnings per share for 2019 was 0.

EBITDA is obviously earnings before interest, taxes, depreciation and amortization, and our referenced adjusted EBITDA also excludes goodwill inventory and fleet impairments. Adjusted EBITDA for the 3 months ended December 31, 2019, remained flat at $5.2 million compared to the same period in 2018. EBITDA decreased $1.7 million sequentially from $6.9 million, primarily due to lower compressor sales and margins.

Adjusted EBITDA for the year ended December 31, 2019, was $24 million, compared to $21.8 million, an increase of 10% for the same period ended in 2019. Total sales revenues, which includes compressors, flares and product sales, increased 34% or $1 million on a year-over-year basis. Sequential sales revenue decreased to $3.9 million from $5.9 million, primarily due to decreased compressor sales.

Fourth quarter 2019 total sales gross margin was 9% of revenue compared to 25% in the third quarter of 2019. Fourth quarter 2019 compressor-only sales increased from $1.5 million in the fourth quarter 2018 to $2.9 million this quarter.

Compressor-only sales of $3 million compared to $4.7 million in the prior quarter. Compressor-only sales in 2019 increased $4.2 million or 38% to $15.2 million when compared to 2018. Compressor-only sales margin was 3% for the 3 months ended December 31, 2019, compared to 5% of the same period a year ago.

This low-margin was due to unabsorbed labor expenses in our fabrication facilities that were incurred during the fourth quarter. On a full year comparison, gross margin in 2019 was 14% versus 18% in 2018. The gross margin dollars increased 5% this year over last.

Our sales backlog as of December 31, 2019, was approximately $2.2 million compared to approximately $5 million in the third quarter of 2019. We continue to see growth in our rental business, with rental revenue of $15.3 million for the fourth quarter of 2019 and $56.7 million year-to-date. Rental revenue increased 19% for both year-over-year periods and the full year comparison.

Sequentially, rental revenues increased over 6%. Compared to the third quarter 2019, our average rental rates on a per unit basis increased 5% and were down 5% on an average per horsepower basis. This slight decrease in per horsepower rates is not uncommon as larger horsepower equipment costs less per horsepower, which translates into lower per horsepower rental rates. Rental rates increased by an average of 13% per unit in the year-over-year quarters, mainly due to our continued penetration into the larger horsepower market, which carried higher rental rates. Reported rental gross margins this year were 47%, a decrease from third quarter 2019 rental gross margin of 54% and last year's fourth quarter of 53%. Our rental margin this quarter was negatively impacted by the previously mentioned bad debt charge.

Without the bad debt adjustment, NGS would have posted a 51% gross margin. Lease size at the end of December 2019 totaled 2,304 compressors or almost 429,700 horsepower, an addition of 28 units or almost 23,000 horsepower during the fourth quarter.

As of December 31, 2019, 26% of our utilized horsepower is classified as large. For the past 12 months, we have added 82 new fleet units, totaling 74,000 horsepower, with 95% of those units classified in our large horsepower category.

Our horsepower utilization is 70% and unit-based utilization was 62% as of December 31, 2019. Our large horsepower units continue to exhibit greater than 90% utilization.

Our large horsepower class continued to grow throughout the year in the fourth quarter and our mid-range horsepower experienced incremental gains throughout the year. We anticipate softening in our small and medium horsepower fleet utilization this year, but have some cushion going into the year with some opportunities we are presently executing on. Overall, we have 30% more horsepower-generating revenue as compared to last year's quarter and 11% more revenue-generating horsepower sequentially.

I mentioned last quarter that our rental fleet CapEx was projected to be $60 million to $65 million for the full year of 2019. In fact, in 2019, we spent $65.7 million on rental fleet equipment. I'll remind you the -- at least 90% of that was precontracted equipment. I also mentioned in the last call that we thought our CapEx would be down roughly 50% in 2020. Now due to the severity of the downturn in commodity prices and the operating environment, we anticipate CapEx could decrease by approximately 75%, when compared to 2019 levels.

On August 12, 2019, NGS announced that our Board had approved an authorization to invest up to $10 million directly into the company through a stock buyback. The authorization expires on September 30, 2020. As of December 31, 2019, the company had repurchased almost 38,000 shares at a cost of almost $490,000.

We continue to be vigilant in protecting our cash position in the current environment, and we'll -- and will remain judicious in making capital allocation decisions. That said, we continue to believe that our equity remains one of the more attractive investments available to us in the current environment.

Looking at the balance sheet. Our total bank debt remains minimal at $417,000 as of December 31, 2019, and our cash balance remains strong at $11.6 million. In addition, we have a largely untapped credit line of $30 million available to us, which provides ample liquidity in nearly every considerable scenario. We generated positive net cash flow from operating activities in this quarter of $8.1 million, which represents 41% of our quarterly revenue. Our operating cash flow in 2018 was $23.7 million, and it increased 24% to $29.4 million in 2019.

There are not many companies in the oil field services space that have a recurring rental revenue stream, essentially no debt on the balance sheet, cash reserves in the bank with strong cash flow yield, while trading at a meaningful discount to tangible book value. Before I take questions, I want to thank the entire NGS team for their dedication and effort during the past year and in the first part of the new year.

In a very difficult operating environment, NGS managed to continue to grow our customer relationships, build our recurring revenue base and significantly build our higher horsepower compression fleet without using debt, while maintaining a strong balance sheet with net cash. The coming months will be challenging, but we have a fleet of new advanced compression assets that should start to generate cash flow and earnings in the months and years ahead.

Ross, this is the end of my prepared remarks. So if you would, please open the phone lines for questions.

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

Realizing the environment is tough to predict, just wanted to get some boundaries on kind of what your business looks like? And I think a number of the high horsepower units were sort of fully contracted for a couple of years. But could you remind us on how much of your business, I guess, in the next 2 to 12 months is sort of fully contracted? And how much is on the month-to-month basis?

Well, the -- like I mentioned, there's 26% of our working horsepower is high horsepower and probably 90% -- 80% -- well, let's say 80%, 85% of those is contracted multiyear, so from say 3 to 4 more years. We've got a pretty good base on that. The rest of the fleet is not long-term contracted. They're all on minimum terms of some point, 6 to 12 months, then they go month-to-month. But overall, I'd say good long-term contracts probably comprise 20% of the horsepower, which is actually, historically, a pretty high percentage because our business and the compression industry as a whole, typically runs on short-term contracts, 6, 12 months and month-to-month extensions after that. So 20% doesn't sound like a whole lot, but it's pretty good from a horsepower basis in -- that's utilized horsepower and historically, it is probably the strongest we've seen.

Okay. Great. That's great color. And then the sort of backlog of projects that you have yet to complete and spend CapEx on is -- when does that end in 2020?

We're pretty well -- actually...

Certainly. Committed?

Into that. We've got some equipment to build over the next quarter, so not a whole lot. I mean we have slowed down and have -- of course, they had to make adjustments to the workforce on a fabrication standpoint. But we don't -- but there's not a whole lot of money involved. I don't think there's probably more than $4 million, $5 million that we've got to build from an execution standpoint. And again, that equipment is pretty contracted.

So that will stretch out another quarter or so, minimal CapEx and then go out in the field. So like I mentioned, we think CapEx, as said last time, 50%. Of course, that's before the virus really got going and before crude decided to go way south. Now we're down to about 75%. And really, that's only because we had some of this precontracted stuff that fell into this year. I don't really anticipate much rental capital expenses expended the rest of the year. Obviously, things are slowing down. We've got all of our precontracted stuff just about done. And the effort this year will be, obviously, to maintain the big horsepower, but also try to keep our medium horsepower going out. And I'd mentioned, we've got some opportunities we're executing on right now, and these are contracts that came to us in the mid-horsepower range.

Before the end of the year, generally -- and we're still setting equipment on that. And we haven't seen any pullback on that yet, and yet is going to be the operative term for the next year probably. But right now, the 2 or 3 opportunities that we got for multiple rental units beginning of the year or still going forward. Some of them slowed down a little, but still haven't seen any pullback on some of that. Now obviously, we're going to have utilization pressure, price pressures and everything else, that's typical in these downturns, and we'll fight through those the way we typically do. But right now, those existing opportunities are continuing and hope that we'll find some incremental jobs going forward to offset some of the expected declines.

Okay. Okay. Good. And then you gave some utilization numbers for year end. What's sort of the utilization rate today? And how much have you seen the decline in utilization? And -- or is that still kind of day-by-day in terms of citing how that's coming in?

Yes. It's still pretty much day-by-day of the -- the horsepower utilization is 70%, unit utilization is 63%. And that's a -- that's the mix between the big and the small, the big horsepower is highly utilized and the smaller stuff is less so in the mid -- so -- but it changes day-to-day.

Most of what we're seeing -- yes, I mean, obviously, we're seeing some equipment come back because of $20 oil. It's tough to make money sometimes. But also, we're seeing people, just from a discount basis, which -- I don't know, if you want to try to rank bad news, but discounts are better than terminations. And so we're working with customers on those. And at this point, everybody's kind of working together to see what's good for the operator and what's good for us and things like that. We've got a lot of good relationships, good service out there, and that carries you a long way in times like this when we have downturns, and this will be a severe downturn. So we're optimistic we'll come out much better than the industry in the end, but you still got to fight through the details of it.

Our next question comes from Kyle May from Capital One Securities.

So all things considered, so I was hoping we can maybe kind of go into the outlook for 2020 a little bit more. And I realize I appreciate there's not a lot of visibility. But as you've mentioned, there's several different things going on, and also, in the 10-K filing. And you touched on some potential headwinds. So is there any way you can help us kind of frame up how you're thinking about the year? Maybe talk about the potential magnitude of some of the impacts that you're seeing?

Boy. It's -- I'll say, it's tough. And from -- again, the big horsepower side, we're not as worried about because that stuff, good times are bad, tends to be pretty sticky. It's big equipment, it's expensive, it's not really easy to move around, et cetera. And again, to remind everybody that we always -- what we always try to remind everybody is, we're on the production side, not the drilling side. So production tends to stay. Obviously, if you get below cash cost, production has to come down too. But generally, that's what still pays the light bills. So production tends to stay out there. There may be adjustments, maybe pressures and things like that. But we're on a better divide of the energy industry right now.

The big horsepower, not too bad. I do expect more pressure on utilization in the mid- and small horsepower stuff, which is typical. It's not, I think, different. This downturn is not going to be different than others. It's just quicker, very fast down. And -- yes, but it's not like we, "Shazam, a downturn. What do we do now?" We've got game plans in place. We know what to do and how to handle it. It's just the speed of the decline had been pretty quick. So it's real hard to say what's going to happen on any of this stuff. I fully expect utilization to come down. How much, I don't know. I expect pricing come up, I don't know. We've had some -- we've built up some good cushion over '19 from utilization, from pricing, positive impacts and things like that. So we've got cushion built into the system anyway, but it's still going to hurt. We are still going to see things come off. So I'm dancing around answer your question, right, can you tell? It's just hard to say what's going to go on. I'll tell you there's going to be declines, but I don't know how much and I don't know exactly when it's going to happen. We're starting to see all those pressures. And the worst pressure we typically see, if it's just us and customers dealing, that's okay. We're -- good relationships, good equipment, good service, et cetera.

The wild card in all these things is competition and what they do. And they will typically drop pricing a little more severely than we will. They've got other issues they've got to look at. We don't have to look at that, they do. We don't have any payments like that. We own every bit of our equipment. So that's always the wild card as to whether everybody maintains a decent amount of discipline, or the bottom drops out, and that's yet to be seen. We don't have a feel yet how that market is going to be. But that's the one we always have to kind of keep a little closer eye on. So Kyle, I can't answer your question. I don't know what kind of decline we're going to see, and I really hesitate to even throw a number out there.

That's fair. I appreciate the detail and the color there. One other question I was curious about, and you mentioned the large horsepower contracts are definitely longer in length and more sticky. But as we think about the smaller and mid horsepower size, can you give us any color or talk about how, I guess, customers are changing those contracts? Are they requesting changes? Kind of what's the dynamic there?

We've seen -- and again, we're month into it. So we don't know all that might come. But typical on that stuff, that stuff is a lot easier to move around, not that expensive to move around. And so customers will tend to either want to -- obviously, they'll come back and say, can we help them? And that's typically always a yes. And we'll try to -- we'll negotiate something. Or if we can't negotiate something, obviously, the customers are free to go out and find something else. If they still got production and wants put down the line. And you can do that on smaller equipment because it's just easy to go around whereas the big stuff, it's just not. So yes, we'll see some of that.

We'll see -- there might be some replacements just due to us not being able to get to where the customer wants us to get to. And, of course, there's storage out there, 20%, 25% decreases and stuff like that. And we're -- we don't play in that ballpark. We don't look at that kind of -- those kind of decreases. So if somebody wants a 20% decrease, they're probably going to have to figure something else out because we're not going to -- we just can't go that. We don't think it's fair to go that. So -- and that's why I referenced before, competition is the big wild card in some of those things.

So typically, up till now, we haven't seen that. Customers have been, I think, fairly pragmatic about it, like, "Hey, you read the papers lately? All is this, and we need some help." And yes, that's fine. We always try to figure out what we can do. And we always try to get a little give-and-take on it. If we're going to do this, what can we do to cut our costs and those sort of things. I mean one thing we will not do is, there's going to be more slow pay and issues around that in a downturn always are. And we tend to get pretty strict on those items to where -- if there's potential payment issues or stuff like that, we typically won't deal a whole lot on discounts until we get all that straightened out.

So it's a -- it's negotiation, we tell our sales guys, and we've already got a process in place to evaluate every request, and we do that centralized. It's me and a couple of other guys look at this stuff. Every one of them and decide what we can do based on what's our utilization on that particular equipment. What's our dys- in the area, things that drive cost, and that tells us a little about how much discount we can give or can't give. And so it's -- we've got a process set up. Unfortunately, you get to do this every few years, so we don't have to reinvent everything all the time. But it's just -- in a medium small horsepower, it's just going to be, typically, going to be discounts. Sometimes you'll get replaced. But we didn't see the replacement that much in the last downturn. It's typically, we just had to kind of figure out discounts and what we could do.

Got it. Okay. That's helpful. And then one last one, just kind of a housekeeping thing for me. I think you mentioned in your prepared remarks. But can you repeat the compressor sales gross margin percentage for the fourth quarter?

Yes. I don't want to. It's 3%. We're not going to do that. We had extra -- yes, we had extra labor in shops at that time, it's unabsorbed. So we didn't have any place to charge it. When your equipment -- to me, and this is typical, too, in a downturn, if you've got a fabrication facility and it's a plant. Those work better at higher utilization and capacity. And of course, the utilization is coming off. And when it comes off, you don't have as much equipment running through there to absorb all the costs of that facility, and that's what happened.

They just -- we've got 2 facilities, just happened to one of them. And so we've got to take -- and it's typically labor. You got extra labor that is not fully utilized. So that unutilized labor or unabsorbed labor is what we had to take a charge for. Not charged for, I mean, this an expense that went to the income statement.

Our next question comes from Tate Sullivan from Maxim Group.

A couple of good questions earlier on the commitments for rent payments for the rest of the year '20. I think in the K, it's $25.9 million. And just to circle back on that, is that because you have a larger percent in your horsepower, as a larger horsepower, is that a larger percent of coverage, if you will, in this downturn?

Yes. Well -- okay, I didn't hear you. The 25.9, what percent was -- was what?

Will that $25.9 million in the K is the future of minimum rent payments with the current contracts you have? And so I just -- I mean, is that a much higher leverage or throughout in your coverage, going into this downturn in previous downturns. And I think you answered it.

Yes. Yes, it typically is. Now I'll caution everybody. Those are contracted rates and things like that. And in a downturn like this, those are -- there may be, I'll say, "opportunities." to help customers on those. So I imagine we will probably approach a little on some of those 2. But again, we always try to -- especially, if these are contracted deals, if equipment -- in any given time, probably 25% -- 20%, 25% of the total fleet is under contract of some sort, whether it's 12-month or 36-month. But if people come to us in a -- within a minimum term on equipment, we technically don't have to do anything. We typically do because obviously, they're long-term customers usually and what goes around comes around in this business. So we will typically try to figure something out and give them some relief of some sort while maintaining what we need to do. In exchange, well, longer subsequent terms at the end and things like that. So just to kind of [bound] those numbers a little.

Okay. And then just as your equipment comes in or either ends a rental contract or a competitor comes in with an aggressive price to swap out the smaller horsepower, I mean is some of the equipment coming in fully depreciated at this point? Or how will you evaluate the future repairments for this year at least? And what's been the feedback from accountants or just can you give some context on that evaluation?

Yes. The medium stuff -- the small stuff really is about all at 0. I think in last quarter, we took [a one-off] million charge and just wrote off the rest of the small horsepower we had idle. Now we'll get some small horsepower back that still has loan book value, but it's going to be pretty negligible. So it's just 60 -- 0 book value business. Medium, we're probably about 2/3 through the life, depreciable life on that stuff. So there's always book value on that, but it's relatively small. So the medium stuff, still have some book value, it's still good equipment. It's typically wellhead, gas lift, which is still a good way to produce shale oil wells. Never say never, all right? I don't want you writing this down. If you do, write it in pencil so I can erase it later. Yes, we don't -- we haven't -- looking out, we don't anticipate any impairment on what we've got. We've taken some in '19. Of course, we're talking before this downturn, but equipment's still good, and we really don't anticipate that happening.

Now that's my operational view of it. If you get down from an accounting standpoint and have to look at the gearing cost or something versus a potential present value of the rental, et cetera, it's a whole different deal. But right now, we don't anticipate any impact from that, at least for 2020.

Our next question comes from [Steve McLean] from [SM Investments].

You almost answered my question earlier, so I want to ask it in a different way, because all of us are hearing about drilling, rig activity dropping 40% and completion activity dropping 40% or 50% and certain operators saying they're going to have a completion holiday. But is it a fair statement that their maintenance CapEx is one of the last things that they try to touch and that provides NGS with a little bit better position in this downturn than if you were a drilling contractor or a pumping company? Is that a fair observation for you?

Yes. No, I think that's exactly right what I alluded to a little before being on the production side versus the drilling side. If you're a driller or run a frac company right now, I mean, you're seeing the blues. I mean, we're all going to be in tougher shape than we were. But I mean, those guys are -- it's rough. Because, number one, you go out and recreate a revenue every day, right? You got to roll a truck to get revenue. You got to drill a well to get revenue and things like that. And if the number of wells goes down, the number of completion goes down, there's no work. We've got the advantage, besides being on the production side, rental revenue recurring somewhat annuitized. Obviously, it can fluctuate, but I've never seen it go to 0 yet and it won't.

So I think you're right, Steve. If you look at the production profiles versus the drilling profile, production is a -- drilling gets cut very, very fast because it's quick, it's easy to cut. Hey, ditch that well and go home. Production, you need to keep on -- and sometimes you need to keep it on even when your cash cost might be lower because of well damages if you shut it in, things like that. But you've always got to have some revenue running through the operator companies or -- they're our business, right? So yes, everybody focuses on production more so now. And obviously, it's going to be low-cost production, and that's where the tough times come, but I'd rather be on this side than that side any day.

And Steve, at this time, there are no further questions.

Okay, Ross. Appreciate it. Thank you, everybody, for joining on this call. I appreciate your time this morning, and look forward to visiting with you again next quarter. Thanks.

This concludes the conference call. Thank you for attending.