Natural Gas Services Group, Inc. (NYSE:NGS) Q1 2021 Earnings Conference Call May 13, 2021 11:00 AM ET
Alicia Dada - Investor Relations
Stephen Taylor - Chairman, President and Chief Executive Officer
Conference Call Participants
Rob Brown - Lake Street Capital
Tate Sullivan - Maxim Group
Good morning, ladies and gentlemen and welcome to the Natural Gas Services Group First Quarter 2021 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. Alicia Dada. You may begin.
Thank you, Ross 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 actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; introduction of competing technology 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 now turn the call over to Stephen Taylor, who is President, Chairman and CEO of Natural Gas Services Group. Steve?
Thank you, Alicia and Ross and good morning everyone and welcome to Natural Gas Services Group’s first quarter 2021 earnings review. Thank you for tuning into our call.
Well, it’s only a year ago when our business, our industry and the world around us came to nearly a complete stop. It seems like it was just yesterday and forever at the same time. While I have said this before, it deserves one last mention. The pandemic and the resulting slump in energy demand and collapse in energy prices had a profound effect on our business, not just from a revenue and profit standpoint, but also from the way we do business, running our core business from the homes of our employees, conference rooms replaced by cameras and Zoom meetings and necessity to completely re-imagine our field business to ensure the safety of our employees and customers.
The challenges to our business were unprecedented. However, we still are experiencing the weighing effects of the pandemic we are hopeful of a slow return to normal will accelerate in the coming months. As our results suggest, the energy market is showing early signs of stabilization and we expect a generally steady recovery to continue. We have continued enhanced safety protocols and field operations and many of our central office employees continue to work remotely. Given growth in vaccination rates, we are hopeful that our operations will evolve toward a more normal workflow in the coming months.
While the coronavirus challenges have been in focus for the past year, the first quarter brought another significant challenge, an unprecedented winter storm that effectively severed business in Texas and the region for nearly 2 weeks. Given the storm’s impact on our oil and gas activity in the region, our business should have been significantly impacted. However, largely due to the effort of our field team and quality of our compression equipment, we recorded no material downtime from the storm. This performance is itself extraordinary. Given all that, we are pleased with our first quarter results.
Before we discuss the details of the quarter, I want to update you on a couple of company events. First, as announced yesterday, we closed on a new credit facility with our new banking partner, Texas Capital Bank. This facility initially provides $20 million in revolving borrowing capacity with the ability to expand to $50 million as needed under certain conditions. The size of the facility provides ample liquidity today and into the future, both for internal needs as well as potential extrinsic growth. In addition, we believe the cost of the revolver is among the lowest in the industry. Finally, the 5-year facility gives us plenty of runway and extends the refinancing horizon well beyond the energy industry average. We are excited to work with Texas Capital, a Texas bank with a continued interest in Energy Finance in the coming years.
Second, earlier this week, we announced the appointment of Micah Foster as our new Chief Financial Officer. Micah has nearly two decades of oil and gas accounting and finance experience, both in audit as well as inside a public energy concern. He stepped in as our interim controller in January and was integral in our year-end accounting process as well as working to close the new credit facility. We are pleased Micah has joined the NGS team and look forward to his finance and accounting contributions.
Finally, I want to thank Larry Lawrence for return to the company from his well-deserved retirement to serve as our interim Chief Financial Officer. Larry’s willingness to jump back in when needed in January was also key to completing our annual accounting as well as closing our new credit facility. Larry will re-retire at the end of this week, and I’m personally grateful for his effort in our longstanding friendship. As noted and as the details that fall will demonstrate, we are pleased with our financial and operational performance in the first quarter of 2021.
Our rental revenue increased 4% sequentially and was driven by increased rentals of our large horsepower units. Our sales revenues improved and gross margins across all product lines strengthened. Unit and horsepower utilization remained solid, and we generated adjusted EBITDA of $6.5 million, an improvement in both comparative quarters and an increase of 21% over the fourth quarter of 2020. Our operating cash flow for the quarter was a strong $7.4 million.
Looking further at revenues, NGS reported total revenue of $18.4 million for the first quarter of 2021. This is a 3% increase from the same quarter in 2020 and as a result of an almost doubling of sales revenues, balanced against a modest 5% decline in rental revenues over the year. When comparing consecutive quarters, we had an increase in total revenues of 8% or about $1.4 million. This consisted of a 4% increase in rental revenue, sales growth of over $1 million, balanced by fall in service maintenance revenue of approximately $250,000. Our revenues have shown resilience and consistency that is fairly unique in our business. Total revenues and sales revenues for both comparative periods grew. Rental revenues grew in consecutive quarters and dipped only 5% when compared to last year’s quarter. The rental revenue number is particularly notable considering the extreme turmoil due to the pandemic and crude oil price collapse in 2020 and a severe weather suffered in this current quarter.
Total adjusted gross margin for the 3 months ended March 31, 2021, increased by 6% to $8.6 million from $8.1 million for the same period ended March 31, 2020. Adjusted gross margin, which does not include depreciation as a percentage of revenue for the 3 months ended March 31 was 47%, an increase from 45% year-over-year. Sequentially, adjusted gross margin for the first quarter of 2020 increased by 10% to $8.6 million from $7.8 million in the prior quarter.
Adjusted gross margin as a percentage of revenue increased slightly to 47% in this quarter compared to 46% in the prior quarter. Selling, general and administrative expenses were $2.6 million, a year-over-year increase of approximately 23% and a decrease of approximately 18%, sequentially. The year-over-year increase is due primarily to an increase in our non-cash deferred compensation expense, partially offset by lower professional fees and various other expenses. Sequentially, the $580,000 decrease is due to reduced compensation expense as well as decreases in non-cash deferred compensation expenses and reduced professional fees.
A quick side note and explanation, I mentioned variations in deferred compensation expenses and their impact on SG&A. The company sponsors does not contribute to a deferred compensation plan. And the investments in the plan are recorded quarterly in a mark-to-market procedure. Although these are non-cash unrealized gains or losses, they do impact our GAAP G&A numbers.
Operating loss for the first quarter of 2021 was $369,000 compared to a loss of $273,000 in the first quarter of 2020. The operating loss increased due to higher non-cash deferred compensation expenses and slightly lower gross margin dollars from rentals, partially offset by higher total sales margins and profit dollars. Sequentially, operating loss improved by $1.9 million from an operating loss of $2.2 million in the fourth quarter of 2020. This increase was primarily driven by higher rental and sales revenues and margins and lower SG&A expenses.
Our net loss after tax for this quarter was $394,000. This compares to a net income of $4.1 million in last year’s first quarter and a $1.9 million net loss in the fourth quarter of 2020. Our net income in the first quarter of 2020 of $4.1 million was driven by a $4.5 million deferred tax benefit related to the CARES Act and our ability to claim net operating loss carrybacks and recoup some past cash income taxes. This will ultimately result in a total of $15 million in actual cash tax refunds, of which we have received $3.5 million plus interest to date.
We reported a loss per diluted share of $0.03 for the first quarter of 2021 compared to income of $0.30 per diluted share in the first quarter of 2020. Sequentially, we reported a loss of $0.14 per diluted share in the fourth quarter of 2020 and a loss of $0.03 in this quarter. This sequential improvement was driven by increased rental sales revenues and related margins as well as reduced SG&A expenses. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. And our adjusted EBITDA also excludes any inventory allowances, stock compensation expense and charges incurred related to fleet retirements, all of which are non-cash expenses.
Adjusted EBITDA for the 3 months ended March 31, 2021, was $6.5 million, a slight increase from $6.3 million for the same period in 2020. Adjusted EBITDA increased approximately $1.1 million sequentially from $5.4 million last quarter to $6.5 million in this quarter, primarily due to higher total revenues, higher overall margins and lower SG&A expense.
Beginning with this first quarter 2021, we have also added back non-cash equity compensation to our calculation of EBITDA and have adjusted comparable quarterly data to provide for accurate comparisons. Total sales revenues, which include compressors, flares and product sales, almost doubled from $1.4 million to $2.7 million on a year-over-year basis. Sequential sales revenue increased 63% to $2.7 million from $1.7 million. The increase in both comparative quarters was primarily driven by an increase in compressor sales. First quarter 2021, total sales adjusted gross margin was $95,000. This compares to negative gross margins of $289,000 in the first quarter of 2020 and positive gross margins of $48,000 in the fourth quarter of 2020. First quarter 2021 compressor-only sales increased to $1.9 million from $850,000 in the first quarter of 2020.
We recorded no compressor sales revenue in the fourth quarter of last year. Due to unabsorbed costs, compressor-only sales margins posted a loss of $136,000 for the 3 months ended March 31, 2021, compared to a loss of $435,000 for the same period a year ago and a loss of $713,000 last quarter. As you can tell, we have not only eliminated the losses and posted positive results in our overall sales business last quarter and this current one, but we have reduced the losses in our compressor sales business, which is a part of our total sales results significantly.
We have made a profit on each individual compressor sales, but the losses come after fabrication burdens, the indirect expenses are applied. However, we are seeing some improvement from expense management and higher sales volumes. Our sales backlog as of March 31, 2021 was approximately $400,000 compared to approximately $1.75 million in the fourth quarter of 2020. However, we have received additional orders totaling another $1.5 million this month.
Rental revenue in the first quarter of 2021 was $15.3 million compared to $16.1 million, a decrease of 5% since the first quarter last year. However, rental revenue grew in sequential quarters by 4% or $600,000 to $15.4 million from $14.7 million last quarter. This is significant, keeping our equipment running and online while installing new equipment this quarter during our extreme weather is a testament to our field force. Their tenacity and dedication to our customers was exceptional.
Rental rates increased by an average of 4% per unit in the year-over-year quarters mainly due to our continued penetration into the larger horsepower market. Our per unit rental rate increase over the past year, when contrasted against the active rental units, highlights the positive impact of our large horsepower units as they carry much higher rates per unit than our average legacy unit. Compared to the fourth quarter of 2020, our average rental rates increased 4% on both a per unit basis and on an average per horsepower basis. Reported rental adjusted gross margins this quarter were 53%, an increase from both comparative quarters of 51%.
Fleet size at the end of March 2021 totaled 2,238 compressors or 441,911 horsepower, which includes an addition of 15 units or 35,000 horsepower in the first quarter. As of March 31, 2021, 43% of our utilized horsepower is classified as large. Over the past 12 months, we have added 45 new fleet units totaling just under 19,000 horsepower with 74% of those units classified in our large horsepower category. A significant portion of our active rental compression is not classified as large as compared to small and medium horsepower and tends to fare better in a downturn. This has been reflected in our financial results and balance sheet strength during this past year of depressed activity. Our horsepower utilization was 65% and unit-based utilization was 57% as of the end of the first quarter 2021. Our capital expense in the first quarter was about $5 million, including $4.5 million of rental equipment. We projected a capital expense budget of $15 million to $20 million this year, so we’re generally on track with our estimates.
Looking at the balance sheet, as noted earlier, we entered into a new credit facility with Texas Capital Bank and retired the most debt we had on our previous facility. Currently, we have no borrowings on the new facility. Our cash balance increased to $30.7 million at the end of the first quarter. This compares to cash a year ago of $13.1 million and last quarter of $28.9 million. The combination of our cash balance and untapped credit line provides ample liquidity in nearly every conceivable scenario.
We generated positive net cash flow from operating activities in this quarter of $7.4 million, which represents 40% of our quarterly revenue. Free cash flow was $1.8 million. We continue to look at a number of opportunities to deploy capital in efficient and value-added ways, including continued growth of our higher horsepower fleet, strategic opportunities and share repurchases, for which we have a reauthorization. We do believe the current share price provides a unique opportunity to add value to our long-term shareholders. We continue to be one of the few companies in the oilfield that has a recurring rental revenue stream, essentially no debt on the balance sheet with significant cash reserves and a consistent ability to generate operating cash. We like our competitive position as the economy and energy markets continue to reopen.
Well the hindsight remains somewhat blurred by the pandemic, early second quarter activities seem to be continuing a pattern of slow and steady growth. While I have some concerns about the sustainability of higher commodity prices, it does appear that prices even modestly lower from recent highs will continue to support incremental additional production activity, which helps our business. Moreover, our continued transition to higher horsepower units continues to provide opportunities for growth of market share and margins. We remain optimistic that the balance of the year will provide opportunities to grow rental activity, gain market share and improve overall margins.
Before I conclude, I also want to welcome Nigel Jenvey to our Board of Directors. Nigel is a longtime energy strategist, focused on environmental issues, including spending 2 decades on developing carbon capture technologies. Nigel recently joined Baker Hughes as Managing Director of their new frontiers initiatives. Nigel brings a wealth of knowledge and experience to our Board, including significant experience in addressing ESG issues. We look forward to his expertise and input.
The Board also announced its decision to transform the former Governance Committee into the Environmental, Social and Governance Committee with Nigel as a Chairman, another step in support of the company’s commitment to continuous improvement in environmental, social and governance issues, including strong sponsorship for such initiatives from our board. As always, our success is a result of the unwavering commitment of all members of the NGS team to make certain our customers are both satisfied and appreciated. Over the past year, our success is a direct result of the creativity, flexibility and effort of our people from the front office to field services. They deserve our thanks for a job incredibly well done.
Ross, that’s 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. Please go ahead, Rob.
In the quarter, nice to see some recovery here. I just wanted to get your view on the pricing environment. How has it been going this year? What are you seeing in the pricing at this point?
You always have to break it down between horsepower ranges than anymore, it seems like. I mean the high horsepower seems to be holding up fairly well. We always have somewhat of a value-added or price – premium price product and offering, which we can get. We always seem to be the price leader. So the competitors tend to necessarily end right under us. So the gap seems to be steady. So the pricing there seems to be okay, smaller and medium horsepowers where you get traditionally more of the pricing pressure. And we see a little bit of that. And that’s primarily driven, especially in the small horsepower by very small regional players. So we see some of that. But generally, I would say it’s fairly stable right now. Obviously, oil price helps; gas prices, no worse and no better than it has traditionally been. So it’s kind of a non-issue. But most of the work being gas lift, which is associated with the crude oil price and crude oil market seems to be generally okay right now.
Okay, great. And then on the high horsepower investments you talked about. Where do you see opportunities there? And I guess, what remains of high horsepower units that you have to put into the field at this point?
There is still opportunity there. That’s the small, medium and large horsepower categories. That’s the one still with the most opportunity in it, not just from share growth, but obviously, revenue growth because the revenue per unit is so high on those. So we – that is still our primary focus. Obviously, we’re not taking our eye off the ball in the medium and small horsepower, but certainly a primary focus from a capital spend standpoint is the higher horsepower. So there is a lot – we’re still the new kid on the block on that as far as when you start looking at our bigger competitors on it. But we think we’ve made inroads in it. We think we can continue that. So that’s where the opportunity lies there. And it’s in the traditional horsepower, we’ve seen – we classify large horsepower for our fleet. It is different from other people from 400 horsepower up to about 1,400 horsepower. And we’re even seeing opportunities to go a little higher on some of those stuff where we evaluate those as they come along. But we’re not worried about getting into that bigger horsepower, we just had to kind of see what they – how they develop, but there is opportunities in the – in that horsepower range I mentioned, plus this even larger horse power, too. And we’ve got the – obviously, the financial wherewithal to pursue those as required. Now I mentioned too that all the capital we’re putting to work is good return capital. As far as what more do we have to put out, we’ve had a fair amount of units on standby, getting paid a standby rate, but they haven’t been at full rate, but they – we anticipate the majority of all of this large horsepower equipment being installed by – in Q2, Q3 and certainly by Q4. So by the end of this year, all of the big horsepower capital we’ve spent the last couple of years should be at earning full 100% revenue.
Okay. Great, thank you. I will turn it over.
Okay. Thanks, Rob.
Our next question comes from Tate Sullivan from Maxim Group. Please go ahead, Tate.
Thanks you. Good morning, Steve.
Hey, you commented on the pricing a little bit, but has any smaller horsepower units started to go out the door? Do you see with a more stable operating environment or what will it take to get more smaller horsepower clients demanding more units?
Yes, we – that horsepower range is generally stable. I mean we will get some fluctuations in it quarterly up or down, depending on what’s going on. But the – what we need for a lot more to go out in that horsepower range is a lot better gas price. And not just a lot better gas price, but some surety that gas price lasts a little bit. Now it’s been kind of a cool winter and spring across the country. So that’s helped somewhat, but we are headed into the solder season and then into the summer season, where you’ll have commensurately less horsepower on just pure dry natural gas because of space heating requirements going down, stuff like that. So, generally, summer times when it goes into storage and pricing tends to moderate somewhat. So it’s been the case for 10 years, right, a little more gas price, a little more gas price, you get it for about a week or 2, then it falls back down to kind of normal levels which are – you can talk about the rig count somewhat suboptimal for operators to chase gas. So I think it just stays and goes on smaller stuff. We make money at it, but we’re not putting capital in it. It’s not a growth market. We’ve repeated that before. And we take the opportunities to do what we can on that as we go along, whether it’s putting equipment out or like we’ve done in the past, taking some equipment out of the fleet. But that’s not going to be a – it’s just not a growth area. Obviously, the growth is high horsepower. And then we think the medium horsepower is – has opportunities for growth. Now from a capital standpoint, we’ve got the equipment we can utilize, but certainly from a market share standpoint, a little revenue standpoint, too. So – and that is primarily wellhead gas lift equipment at medium horsepower. So with the oil price, we have some hopes that we will get a little stronger than that towards the end of the year, too.
Okay. And then last one for me. You mentioned, I think, if I heard right, 1.5 million orders so far, sale orders so far this month. And do you expect a quick turnaround on those orders? And were they – are they at similar margins compared to the last couple of quarters or can you just review your comments around those orders, please?
Yes. Yes, that’s just the order. So – and actually, those are received, this is May, so this month, the last couple of weeks, the fairly recent orders, so that we will recognize revenue on that equipment, probably, it might make it into the end of Q3, probably more likely Q4, fairly long lead stuff. These jobs are – these particular jobs are pretty high spec, stainless steel type of compression. So takes a little longer lead time for some of the exotic metals on that. But we’ve got – yes, we’ve quoted some decent margins in that stuff being a little more specialized. So we expect some good returns out of it.
Okay. Thank you, Steve.
[Operator Instructions] And Steve, at this time, there appears to be no further questions.
Okay. Thanks, Ross, and thanks, everyone, for joining me on the call. I appreciate your time this morning and look forward to visiting with you again next quarter.
This concludes today’s conference call. Thank you for attending.