Natural Gas Services Group Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 3, 2023

There are 7 speakers on the call.

Operator

Morning, and welcome to Natural Gas Services Group, Inc. 4th Quarter 2022 Earnings Conference Call. All participants are in a listen only mode. After the speakers' presentation, we will conduct a question and answer session. As a reminder, this conference call is being recorded.

Operator

I would now like to turn the call over to Alicia Datta, Investor Relations representative. Thank you. Please go ahead.

Speaker 1

Thanks, Julia. Hello, everyone, and thank you for joining us to discuss our full year and Q4 fiscal 2022 financial results. Today's call is being webcast on our Investor Relations website at ndsgi.com. Also available on the site is our earnings press release, which was issued Friday, March 31. Before I hand the call over, I'd like to remind everyone During today's call, including the Q and A, we may make forward looking statements regarding expectations of the company.

Speaker 1

These forward looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call. These risks are detailed in our most recent annual report on Form 10 ks and as such may be amended or supplemented by subsequent The statements made during this call are based upon information known to Natural Gas Services Group As of the date and time of this call, NGS assumes no obligation to update the information presented in today's call. With that, I'd like to turn the call over to Steve Taylor, our Chairman of the Board, Interim CEO and President. Steve?

Speaker 2

Thanks, Alicia and Julianne, and good morning, everyone. Welcome to our year end 2022 earnings conference call. Thank you for joining us this morning. Before taking your questions, I'll highlight our full year results that were detailed in our earnings press release Friday afternoon, discuss the current business environment and provide comments on other aspects of our business. I also note that we filed our annual report on Form 10 ks with the U.

Speaker 2

S. Securities and Exchange Commission on Friday. Before providing the financial highlights for the Q4 and full year of 2022, let me provide some context on the current operating environment. Like the broader markets, energy commodities have been increasingly volatile in recent weeks. This isn't terribly surprising given the overall uncertainty in the broader economy.

Speaker 2

We anticipate that velocity to continue, at least in the near term until the broader financial markets experience more stability A clearer picture regarding the banking system, Federal Reserve activity and the overall economy emerges. That said, while it's unlikely that we will see the same oil price acceleration experienced in the past year, we believe the capital discipline of The production restraint demonstrated by OPEC Plus members and the lack of near term production growth is likely to protect the market from an over 5 Crude in the Coming Months. And if this weekend's unexpected OPEC production cut is any indication, We may be witnessing a new chapter in global energy economics unfold, one that provides even further support for hydrocarbon prices. On the demand side, while we're cautious on demand growth and in fact could see modest contraction from Western economies, That slowdown should be mitigated by a steady increase in petroleum demand from China as the economy reopens. In short, while we are less optimistic about price acceleration in the coming months, we are relatively confident that prices will settle in somewhere in the $80 range.

Speaker 2

We should provide excellent support for current production activity and the growth plans budgeted by our customers. Of course, we will vigilantly watch for signs of changes in supply and demand fundamentals and look to position the company to take advantage of opportunities Identify challenges that would impact our operations and capital spending plans. While natural gas market has less impact on our business plan, it Fair to say, we are somewhat confounded by the lack of support for gas prices. That said, a perfect storm of an Incredibly mild winter, especially in Europe, what appears to be more moderate industrial demand in North America and maintenance issues that reduced LNG capacity from the United States all had an impact on gas prices. While all of those variables are likely to return to more normal levels over time, it It's unlikely that natural gas prices will meaningfully accelerate in the near term.

Speaker 2

That said, regardless of the actual level of oil and natural gas prices, The dynamics of the production market provide significant opportunities for the compression business and Natural Gas Services Group in particular. As noted in previous quarters, as reservoir pressures decline, unconventional production increases and other production challenges arise, Every barrel of oil produced in North America and around the world requires advanced techniques to reach the surface, one of the most important of which is compression. After some major economic or geopolitical surprise, which could include continued production of straight from OPEC, That would have an impact on global energy demand. We believe commodity prices should remain firm, which should lead to steady growth in production spending. NGS, with our past financial discipline, is well positioned to take advantage of these opportunities, Beginning this year and beyond.

Speaker 2

As we have said in our last call, while we have been and will continue to be focused on operational efficiencies, Our line of sight to organic growth opportunities in the high horsepower market remains as strong as the industry has seen in a long time. We announced during the quarter that we expanded our credit facility with Texas Capital Bank to provide running room for future growth. At the end of 2022, we had approximately $25,000,000 drawn on that facility. And at the end of the Q1 of this year, our bank debt is roughly $55,000,000 This leverage has allowed us to grow our fleet for key customers, the vast majority of which is pre contracted work. Our largest customers are among the best capitalized and strongest companies in the exploration business.

Speaker 2

We are always seeking new clients as a way to expand and diversify our revenue base. While our position as a net borrower is a relatively new development for Natural Gas Services Group, We have a long track record of successfully managing our balance sheet and making calculated opportunistic investment decisions. Our borrowings are the result of the opportunities presently in front of us and our assessment of the future potential of key customers, including our quest to maximize returns for our shareholders. In the past, we have been able to fund our capital equipment expansions with a combination of balance cash and operating cash flow. But the present activity is so strong and the equipment is so expensive, they were only able to take advantage of the market with supplemental I also want to emphasize that these are high graded opportunities, ones with long term contracts and market leading rates.

Speaker 2

We are not chasing every job available to us. With that said, let's look at the results from the Q4 of 2022. Total revenue for the 3 months ended December 31, 2022 increased to $22,500,000 From $22,000,000 for the 3 months ended September 30, 2022 or a 2% increase. Total revenues increased year over year from $18,000,000 for the 3 months ended December 31, 2021, for a 25% increase. Rental revenue increased 10.4 percent from $18,600,000 in the 3 months ending September 30, 2022, compared to $20,600,000 in the 3 months ending December 31, 2022.

Speaker 2

Rental revenue increased to 20.6 in the Q4 of 2022 from $16,500,000 in the Q4 of 2021 for a 25% gain. Both comparative period increases were primarily the result of the increased deployment of higher horsepower rental units with the Q4 2022 growth supplemented by rental price increases. Rental revenues have strengthened and are now running between 85% to 90% of our total revenues in all comparative periods. As of December 31, 2022, we had 1221 utilized rental units, Representing just over 318,000 horsepower compared to 1254 rented units, representing 298,000 horsepower as of December 31, 2021. We ended the 4th quarter with 65 point utilization on a per unit basis and 74.8 percent utilization on a horsepower basis.

Speaker 2

Notably, all of our higher horsepower equipment is rented, Meaning that everything from 400 horsepower and larger is 100% utilized. Utilized horsepower increased by 7% in the 4th quarter compared to the year ago period. Our revenue per horsepower increased 27.3% when compared to the same periods, Demonstrating the robust price increases we have been able to implement over the past year. Our total fleet as of December 31, 2022 consisted of 1869 units and just over 425,000 horsepower. Our large horsepower assets Sales revenues for the sequential quarters declined from $1,800,000 in the Q3 of 2022 $1,300,000 in the Q4 2022.

Speaker 2

But on a year over year quarterly basis, sales revenue increased from $1,100,000 to $1,300,000 For the full year comparison, sales revenues increased from $6,900,000 to $8,600,000 or a 24.5% increase. As noted in our earnings release, adjusted gross rental margin increased sequentially from $8,600,000 46 percent of revenue in Q3 2022 to $11,300,000 or 55 percent of revenue in the Q4 2022. This represents a rental gross margin increase of $2,700,000 or approximately 30% in these sequential quarters. On a year over year basis, our adjusted rental gross margin of $11,300,000 in the Q4 of 2022 more than doubled when compared to $4,900,000 in the same period in 2021. Adjusted rental gross margin as a percent of rental revenues 55% in the Q4 202230% in the same period of 2021.

Speaker 2

If anyone recalls, in the Q1 call of 2022, I stated that we would achieve at least a 50% adjusted gross margin in our real estate business By the Q4 of 2022, I'm happy to say we exceeded that with all the credit going to our service forces in the field. That is the Primary financial metric and they did an excellent job. Sequentially, we reported an operating loss of $316,000 in the Q4 of last year compared to an operating loss of $294,000 in the Q3 of 2022. The slight increase in operating loss from the current period This is primarily due to higher SG and A and approximately $280,000 in equipment and inventory retirements. This compares to an operating loss of $8,200,000 for the 3 months ended December 31, 2021.

Speaker 2

Operating income improvement was primarily due to Higher rental revenue, higher rental gross margins and significantly lower write downs from rental and fleet equipment retirements and obsolete inventory. Our net loss in the Q4 of 2022 was $757,000 or $0.06 per diluted share. This compares to a net loss of $80,000 in the Q3 of the year or $0.01 per basic and diluted share. The higher net loss And the quarter was due to higher SG and A and a higher income tax rate. On a year over year quarterly basis, our net loss for the 3 months ended December 31, 2022, was $757,000 or $0.06 per basic and diluted share, Compared to a net loss of $5,600,000 or $0.42 per basic and diluted share for the 3 months ended December 31, 2021.

Speaker 2

Improved rental revenue and gross margins were the primary contributors to the lower net loss. For the comparative full years, net income improved dramatically from a loss of $9,200,000 in 2021 to a $570,000 loss in 2022. For Q4 2022, adjusted EBITDA was essentially flat at $7,800,000 when compared to the prior quarter, We increased significantly from $2,300,000 for the same period in 2021. I I'll note that SG and A expenses in the Q4 of 2022 were approximately $4,800,000 a $2,000,000 increase from the year ago period and an increase Approximately $700,000 in the Q3 of 2022. These increases were primarily attributable to severance and retirement expenses as well as other costs related to our executive transition process.

Speaker 2

Many of these costs were extraordinary and short term in nature, We expect them to significantly decrease by the end of this year. SG and A is likely to fluctuate over the next several quarters due to trailing transition costs The overall growth in our business, but we are acutely focused on these expenses and anticipate bringing them back into the 13% to 15% of revenue range that we have historically experienced. Our cash balance as of December 31, 2022 was approximately $3,400,000 With $25,000,000 outstanding under our revolving credit facility. In 2022, we realized cash flow from operations of $27,800,000 And use $65,100,000 for capital expenditures, dollars 57,000,000 of which was expended on our rental fleet. As a side note, for those of you keeping track of the saga of our elusive $11,000,000 tax refund, there has been some progress.

Speaker 2

We've been lobbying the advocates office of the IRS and recently had a conversation with the service. There is movement, but it's a government speed movement. Any refunds over $5,000,000 have to go through an audit, which is estimated to take another year to complete. Mind you, This is on top of the almost 3 years we've already been waiting. In spite of that, we are celebrating the fact that it appears a real person exists with IRS As indicated earlier, the compression market remains strong and we continue to see demand for new compression units, largely in the high horsepower range.

Speaker 2

We are likely to continue to deliberately expand our fleet to meet demand as long as this expansion meets our return expectations. While subject to change based on market conditions and variability and opportunities, we expect our annual capital budget this year to be $95,000,000 This may fluctuate due to the number of actual contracts we secure, our contract projections and our assessment of any spec builds we need to pursue, We think this is a realistic figure at this time. Before I take your questions, a couple of closing thoughts. First, as noted in our 10 ks filed on Friday, our audit noted a weakness in controls related to our accounting for work in progress or WIP And how we characterize certain WIP in inventory versus long term assets as well as how and when we expense certain WIP inventory. This weakness, essentially a balance sheet reclassification, was a result of a lack of control policy that resulted in the misclassification of certain WIP inventories.

Speaker 2

As a result, we have made adjusting journal entries to correct the errors and worked with our accounting staff and external auditors and consultants to address this issue, Including developing appropriate controls to prevent this issue in the future. We also believe the recent changes in our accounting and finance team and oversight from our new external auditors Overall, we are pleased with the progress made over the past 12 months. While the noise around executive transitions could have been a distraction, NGS was able to remain focused on the business of growing our company and serving our customers, which is reflected in solid growth in our financial and operating metrics. It was now over 5 years ago, we began our transition to a company focused on large horsepower compression. That transition continues and as noted earlier, Continues to grow an important part of our story.

Speaker 2

Nearly half of our rental revenue now comes from high horsepower compression and large horsepower equipment as a key component of our margin growth. As noted last year or last quarter, we are now fabricating 2,500 horsepower compression packages, the largest units in our fleet, And continue to gain traction with those units as well as other categories of large horsepower equipment. We currently have 15 contracts for these very large packages. This is significant as we continue to leverage our large horsepower offerings with a broad range of existing and new customers with an eye towards potential opportunities in midstream markets. We continue to sign rental contracts with both premium rate and term.

Speaker 2

Continued improvements in service and availability should allow that advantage to continue, And we believe it should extend to the 2,500 horsepower market. Also, in addition to our traditional compression business, we continue to see opportunities to provide compression related to methane reduction initiatives, which have received a boost from the Inflation Reduction Act. While still early in the game, our technology should not only reduce the carbon footprint of our compression equipment, it should create operating and tax efficiencies for those engaged in that business. The balance of 2023 could be a pivotal year for this emerging business. On the governance and leadership front, our Board of Directors continues to engage In the search for new Chief Executive and Chief Financial Officers.

Speaker 2

That said, the team and I will continue to focus on the opportunities ahead of us. We are energized by the daily activity and are excited about the future of our company. I'm grateful to J. D. Faircloth and his willingness to step in as Interim CFO And help balance our Finance and Accounting Group.

Speaker 2

And as always, I'm incredibly grateful and proud of the entire NGS team for their dedication and

Operator

Our first question comes from Rob Brown from Lake Street Capital, please go ahead. Your line is open.

Speaker 2

Good morning, Steve. Hey, Rob.

Speaker 3

Just wondering if you can give a little bit more color on the demand environment for high horsepower. I think you said you had 15 contracts in place. How is The new sales activity funnel and how is the cost of demand environment, I guess?

Speaker 2

Now the 15 contracts are just 2,500 horsepower units. So that's a brand new market penetration for us. What we classify as larger horsepower is 400 horsepower and up. And the 400 horsepower It is very robust. We're sold out of those and we're building some more.

Speaker 2

And more than likely, we expect those to be contracted as they roll off. You move up into the 1400 to 1500 horsepower Range equipment and same thing there. We're totally sold out in that respect, and we're building more of the 1500 horsepower And again, most of whether it's 400 horse or 1500 horse or 2,500 horse for that matter, The majority of that equipment, 85% to 90% of it is already contracted. So Obviously, the market is very robust. At this point in time, we don't have anything in the yard.

Speaker 2

Everything is being Build either on pre contracts or in the 400 horsepower, a little Some spec units being built in there because it's a pretty popular unit there. But the so The demand is great right now, and we anticipate it staying that way. Our projections internal projections See a fair amount of big horsepower needed in the second half of the year and into next year. The OPEC move this weekend We'll do nothing to hurt that and probably enhance that. So I would expect that the big horsepower just continues on Until and unless we see some disruptive factor in it, but right now, we see it as being pretty positive.

Speaker 3

Okay, great. And then the CapEx expectation of $95,000,000 is How much of that is from that 2,500 horsepower market?

Speaker 2

That Let me calculate my head. That's probably That's a third to a half of it, just those units right there. They're pretty expensive. So In the 3rd to a half, it's somewhat of a range, but it kind of depends on how the rest of Yes. The build schedule comes out too on your 1500 horse or bent towards 400 horse or something like that.

Speaker 2

But that would give you a Yes, rough idea, say 35% to 50% of it is going to be that bigger stuff.

Speaker 3

Okay. And then you talked about pretty nice growth in the rental in the 4th quarter, driven by price increases. Do you see opportunity for further price increases? Or will that just flow through in 2023 and drive the growth in 2023?

Speaker 2

Yes. We had some increases in Q1 of this year, which we'll report on in the next call. But now I think we're at a Good point right now. Now any further price increases we see or choose to implement will I'd just be as a result of cost of goods going up either the equipment itself Or if we have continued inflation and supply chain issues, just inflationary impacts from those items. But from the point of market driven or Induced price increases that we may just choose to do, we feel like we're okay where we are right now.

Speaker 2

And again, anything further will be just due to Cost of goods or cost of service.

Speaker 3

Okay. Thank you. I'll turn it over.

Speaker 2

Okay. Thanks, Rob.

Operator

Our next question comes from Tate Sullivan from Maxim Group. Please go ahead. Your line is open.

Speaker 4

Hey, thanks. Hi, Steve. Just looking at change in rented compressors, do you I mean on net net, do you still have any smaller horsepower units coming back to you from the field? Or should it be given your recent CapEx and 95,000,000 CapEx plan should be a pretty consistent cadence of increasing the total number of rented compressors in the field?

Speaker 2

Any increase in the well, any increase in the fleet is going to be obviously Primarily driven by larger horsepower stuff. Any increase in rented compressors would just be Dictated by utilization, which we expect the higher horsepower utilization to stay high. The I think the medium horsepower will probably stay fairly steady. The only risk to utilization will probably be in the smaller Horsepower, which is primarily driven by gas markets. But we haven't seen even with the Drawdown in gas price, we haven't seen a whole lot of return on that.

Speaker 2

We had some return last year due to price increases, Which we expected. And obviously, operators don't like the lower gas price, but we haven't seen A lot of equipment come back due to that. I think you have to remember, the gas price fell, But it didn't fall below horse Bend for a decade. It went up mid to the end of last year, Then it's come back down, but it kind of came back down to where it was, just a low price we've all been used to for a long time. So Yes.

Speaker 2

If you look at it on just a point to point basis, it looks pretty bad. If you look at the trend the last year or 2, it's Pretty much business as usual. Gas prices just doesn't do much. There's just a lot of gas in this country. So we don't see a whole lot right there.

Speaker 2

We have seen some weakness in pricing On it, but that's about it, but not a whole lot of returned equipment at this point. Anyway, I'll kind of expand on that a little bit. I've had comments about, well, Gus, You get this you go ahead and get this line of credit and you take on some debts you haven't had. And people don't remember, we used to have debt, but it's been 10, 12 years ago. You do this and now Oil prices had gone down.

Speaker 2

Of course, it came back up today. Gas prices have gone down. Interest rates are going up. Oh, my gosh. What the heck is going on?

Speaker 2

And if you look at our overall fleet, About 25% of our revenue is driven by natural gas activity. So it's pretty small. It used to be 10 years ago, it was 100%. And with this large horsepower diversification, we started into and started shifting our revenue towards Oil commodity economics versus natural gas commodity economics. And so Only roughly 25% of our revenue is driven by pure natural gas activity.

Speaker 2

And the other 75 That is driven by oil, mainly due to the gas lift operations that a lot of producers have started Doing based on with the shale production. So if you look at gas price, it's something I'd love it to go to $5 or $10 I don't think it's going to But any variation in that gas price has a limited effect on what we're doing, has no effect on Capital expense because we really don't reinvest in that smaller market, which is driven by natural gas primarily. And all of our investment goes into the oil market. Now the both commodities, the both FlexWave Oil is a better commodity from the standpoint that there's less it doesn't stay low. Obviously, it fluctuates.

Speaker 2

You go high, you go low, but it Back into a fairly normalized range of times. And then you look at what's happened On the macro aspect from the banking and interest rates and stuff like that, and they continue to go up and The Fed is going to do and inflation and everything else. I mean, there's all kinds of countervailing wins on that. But The interest rates, we've got a good banking group behind us. TCB is in there.

Speaker 2

There's some big banks in there. They did a lot of due diligence on our Projections and financials and they're comfortable with our plans. And we have some nominal Leverage requirements, we don't ever in our projections see going above 3 to 1. In a downturn, we are typically protected by longer terms and the higher rates On that, so whether it's a whether it's debt you're looking at or just the normal fluctuations in the business, Those contracts help get you through those. And then if you ever have to Do something on interest rates.

Speaker 2

There are presently, there are interest rate swaps that are fairly attractive and things like that. You can go from variable to fixed and vice versa If need be. So the interest rate thing, obviously, is something that we watch. We haven't watched it in 10 years, haven't had to. But now with the CapEx we're spending, we'll generate a higher level of cash and EBITDA.

Speaker 2

And our projections look very good And strong and the banks agree with that. So all those factors now, whether it's commodity pricing or interest rates, we pretty well got a good handle on And feel like we're either naturally hedged or can get hedges in place if it appears to be a problem. So Long answer to a short question, I guess, but from the commodity prices and macro Interest rate environment, we think we're in pretty good shape.

Speaker 4

Great. Thanks. And just one follow-up question on The compressors that you are retiring and you're retiring, maybe it's more of an accounting change when you choose to retire those units. But will there Could there be any residual value in the retired units at all? Or do they just simply go to scrap with no potential proceeds Long term for you.

Speaker 2

Yes, the ones we retired in Q4 were all smaller units, pretty Close to the end of their, de peaceful life and actually useful life because when we look at the retirements, not just book value we look at, but It's the cost of overhauling something or rebuilding something back up to usable Potential and then what's your potential economic benefit from it, right? What's your rent going to be? So that drives those decisions too. We were talking about $200,000 worth, which was actually About 150 or 200 units. So it wasn't much of a write down for the number of units, but they're primarily smaller.

Speaker 2

We got them out of the fleet. We typically will it's like I'll take a kid to a candy store. We have these units scattered around. We'll have the field guys strip off any parts they can reuse. And then If we don't think we're going to use them to refurbish or reapply, we'll But one example of reapplication is what we announced last year some electric Motor conversions, we took some 250 horse class compressors, took the engines off those, Actually, we built some of the engines that we use and then put electric motors on them, and we're building up some electric drive packages.

Speaker 2

So We squeeze whatever juice we can out of that lemon before we just send the rest of the scrapyard.

Speaker 4

Great. Well, thank you, Rick. Thank you, Steve.

Speaker 2

Okay. Thanks, Tate.

Operator

Our next question comes from Justin Jacobs from Mill Road Capital. Please go ahead. Your line is open.

Speaker 5

Good morning, Steve. How are you doing?

Speaker 2

Hey, Justin. Good. You?

Speaker 5

Doing well. Appreciate you taking the time here. A couple of different categories of questions here. Let me start on CapEx. The CapEx numbers are surprisingly large, dollars 30,000,000 in the most recent quarter.

Speaker 5

Sounds like you've probably used something around $30,000,000 in the Q1 and $95,000,000 for the coming year. Can you give me a description kind of as of year end, That's when we have detailed info. What how many units are in the process of getting built? And can you break that out 2,500 horsepower, 1200 to 1300 horsepower, 400 horsepower, just kind of trying to get a sense of what the

Speaker 2

Yes. From a Debt balance standpoint, so as I mentioned, we have $25,000,000 at the end of 2022 $55,000,000 at the end of essentially Q1 this year. So we did spend $30,000,000 in Q1, we had spent $25,000,000 in Q4 because we had essentially zero debt beginning in the Q4 last year. We're anticipating each quarter going forward about $20,000,000 to $25,000,000 Q2, Q3, Q4, and that will end up at that $25,000,000 plus $95,000,000 or $120,000,000 Debt balance at the end of this year. Now what that's made up of in If you allow me, I'm going to be a little vague on the counts of equipment.

Speaker 2

I mentioned the 15, Yes, 2,500 horsepower units. I don't want to give too much away to The nefarious ones listening in, but the balance The majority of the remaining Capital is 1500 horse units, and that's going to be Probably half of the budget, of the total budget. So the say, you'll use $120,000,000 And then the balance between that and the 2,500 horse units is going to be the 4 100 horse Right. So it boils down to 400 horse, 1500 horse and 2,500 horse. And The 400 is going to be roughly 10%.

Speaker 2

The 1500 horse is roughly 50% and the balance is 2,500.

Speaker 5

Okay. So let me go to a little different direction. All in cost right now for a 2,500 horsepower, what are one of Not just the compressor, the overall piece of equipment to get it out in the field, what's the capital cost for that approximately?

Speaker 2

The package, it's going to run-in the $2,750,000 to $3,000,000 range.

Speaker 5

Okay. And what is it for the 1500s now?

Speaker 2

Those are in the That's the same thing about $1,000,000 cheaper. Well, let me say 1,500,000 to 1,750,000

Speaker 5

Okay. So those have had those have gone up a little bit by recollection from a year or 2 ago, probably 2 years ago, 2 years ago, those were more $1,000,000 to $1,000,000 a quarter. So we've seen inflation on that.

Speaker 2

When we started building those 1500 horse, Yes, probably almost 4 years ago, yes, they were $1,100,000 roughly. Yes. They've

Speaker 5

gone up quite a bit. Okay. I could probably back into are any of the 2,500 horsepower as of year end, Were any of those out in the field of the, I think, I said 14 that you guys contracted?

Speaker 2

No, no, they're being built.

Speaker 5

What's the expectation of timing when they go out in the field?

Speaker 2

It's going to be a Second half, I mean, it's hard to nail it down because some of that stuff shifts around, but it's a Q3, Q4 sort of

Speaker 5

I guess, if I give

Speaker 2

a Go ahead.

Speaker 5

Yes. I guess, These are big CapEx numbers here. And if we look at the earnings call a year ago, you told shareholders to expect $20,000,000 to $25,000,000 Instead of the $20,000,000 $25,000,000 we had $65,000,000 last year and we're doing $95,000,000 this year. It's just trying to get I think support for shareholders in our understanding of what the plan is and where are we going here on capital outlay. And I appreciate some of the competitive concerns you have in terms of breaking out Number of units, but it's very difficult to project kind of what EBITDA is going to be Generate out of this in the coming year and specifically the timing without some better detail of kind of on each of these units and what the fleet is going to look like.

Speaker 2

Yes. And I understand what you're saying. And we've got, obviously, detailed schedules When things are anticipated to come out, unfortunately, those schedules probably change every 2 weeks based on customer drive and demand. We've got them contracted, but the customers sometimes shift things around, move units in front and behind, things like that. I appreciate what you're saying.

Speaker 2

I just I'm hesitant to put out too much detail As mentioned, just from a competitive standpoint, as far as people know when and where, and obviously, they can guess, most of this goes to the Permian. So it's I can try to think through and maybe come up with a better way To give a clear picture, but I think if you I don't want to break down exactly when certain units are coming out, etcetera. Sometimes just The quarterly spend that I went through a while ago It's probably about the best detail I can give you without going into this many units, that many units. And I understand it's hard to project EBITDA growth off that. But Without getting into too much detail, I'm a little hesitant.

Speaker 5

All right. Well, let me ask another question, which is as you look Forward beyond that into 2024, what level of CapEx should we expect?

Speaker 2

In 2024

Speaker 5

Yes. I mean, I'm just trying to understand if the building spree is going to continue and that's kind of baked in.

Speaker 2

Yes. They'll put our well, I just went through puts our debt balance at $120,000,000 at the end of the year, I'm assuming no interim pay down or anything. We've got $175,000,000 commitment. Our borrowing base now is about 140 So presuming we get to the borrowing base goes up to $175,000,000 that leaves about $55,000,000 not If nothing else changes as to what's left on that commitment. The 20 24 CapEx budget is going to probably depend on really what happens Q3 and Q4 as far as what other orders come On large horsepower rented equipment, it's real hard and almost impossible Say right now, I would I mean, if nothing else, you could say, well, it's $55,000,000 that we run out of commitment, right?

Speaker 2

But obviously, by that time, we'd have higher EBITDA flowing through and Could get more if the market demanded more.

Speaker 5

Well, I mean that's just

Speaker 2

to push back Yes.

Speaker 5

Yes. But just to push back on that for a second, I mean, if you're saying that you've got these 2,500s that are coming on sometime in the second half, Maybe the EBITDA is hitting that point, but maybe it's not if there are delays, some issues getting out there. I mean Q4 a year ago, you had significant Issues and incremental costs and getting new equipment out in the field. And so that's my question here is this kind of all plays into then capital structure as you said, $120,000,000 by year end, that's slightly below what your CapEx, currently that's a pretty material change. And you've got $125,000,000 uncommitted accordion on top of that.

Speaker 5

I just don't know where you're going from a capital perspective. And I'm trying to get an understanding of thinking forward not just 1 quarter or even Three quarters. How much more debt is going to be on this business?

Speaker 2

Yes. Well, our projections Show that our debt would peak and this is based on 2023 from what we see And then this equipment being said and EBITDA some EBITDA being generated in 2024 obviously. Yes, the full year of whatever is put in the second half. Our debt would peak in about the Q4 For this year, all I can say is what we see from a static standpoint now based on our projections now And what we see from the market and the borrowings. And then the EBITDA coming in Starts paying that down and we would have the debts paid down in a couple of years That's static.

Speaker 2

I know your question is, well, I want to know dynamics. I want to know what's going on next year. It's real hard to say what's going on next If the market stays strong, It could be another $95,000,000 maybe. I don't know. That's I hesitate you can throw that number out there because it could be $50,000,000 could be $25,000,000 if everything if we have a big recession next year and things fall down.

Speaker 2

It's just hard to say. I'd have to really take a stab at something that really we don't have any basis in fact for right now as far as What next year is going to look like?

Speaker 5

Okay. All right. Let me go to a different topic Which is the SG and A increase. If I look at 2022, it's $13,600,000 which is an increase Of $2,900,000 versus last year. All this increases Q3 and Q4.

Speaker 5

In Q4, you're running at 4.8 Of SG and A, two questions for you. First is, what are the components of the $700,000 sequential increase From Q3 to Q4? And then second question is, what are the components of the $2,000,000 increase from Q4 a year ago?

Speaker 2

Okay. The primary differences In the year over year, The retirement and severance expenses, and frankly, that was my retirement agreement. And then John Chisholm's severance expenses, the interim there. So we You had higher costs there over $1,000,000 on that. There were Double salaries in there from a CEO standpoint, starting for about 6 months.

Speaker 2

We've had higher administrative salaries Around $140,000 or $50,000 There we had about $150,000 higher Software expenses and about 300,000 We have about $500,000 higher consulting and stock expense. So that was year over year. Now sequentially, the Consulting and deferred comp, again, ran about $500,000 higher health insurance is a little over 100,000 Higher stock about $300,000 higher and administrative salaries also. That's the majority of it. The majority of it is, as I mentioned, some of these transition costs of my Retirement agreement coming back in, John being interim for 6 months in there and the associated expenses there And then higher administrative hours and some higher software costs.

Speaker 5

And stock will be in. What were the nature of the consulting expenses?

Speaker 2

We've had consulted like I mentioned on the accounting We've had some I don't know if the search expenses fell into any one of those. I have to check on that. That may be Q1 expense and just some miscellaneous contract

Speaker 5

That's one of my follow-up questions is where are the search expenses? I know the company has got multiple search expenses. I was hoping at least that that's in Q4, but it sounds like that actually may be in Q1, so we've got incremental SG and A coming.

Speaker 2

Yes. It doesn't look like the search expenses are and I'd have to I don't think the search expense I had double checked for sure, but I don't think the search expenses are in up to Q4. I think they will Show up in Q1. And so that's why I mentioned, we're still going to have some tailing off of some Transition expenses over the rest of the year, getting that the SG and A more in shape and down as we Get other people in and other people out.

Speaker 5

Yes. Well, it sounds like it's actually going to go up a little bit, Dan, because you're going to if you have Your retirement agreement expenses that were hitting in both Q3 and Q4, they're going to be there in Q1 still I assume.

Speaker 2

Yes, that will be, but John Chisholm's Expenses are all totally in Q or last year. And then I think a fair amount of those consulting expenses are there too. And really, the RSV expenses only come down. So there's going to be The search ones would kick in, but there are going to be some offsetting savings there too.

Speaker 5

Yes. I mean, Guys, big picture is that I look at Q3 to Q4, your company adjusted EBITDA went up $20,000 on what we're

Speaker 2

You can.

Speaker 5

Sorry, the company can you hear me again?

Speaker 2

Yes.

Speaker 5

Okay. The company adjusted EBITDA in Q3 to Q4, I mean, went up $20,000 So your rental profit increase, which is material, is getting completely eaten up by SG and A. And I'm trying to figure out What are the new units are coming in and when is that EBITDA rolling in? I've got SG and A volatility. Very difficult to see kind of what EBITDA looks like for the year.

Speaker 2

Yes. No, you're right. That was the disappointment in these results that The very good operating results got chewed up by some other transition Severance and retirement expenses. And it's I know We don't break those out publicly on the SG and A, but that's just looking forward and seeing what's coming off and what may be coming on, which the only thing coming on would be that we see would be search expenses. Yes.

Speaker 2

We think we'll still be able to get down into that 13% to 15% historical range. We'll be approaching towards the end of the year, but certainly into next year. I think we'll have that in a lot better shape, Because there are some trailing ones admittedly.

Speaker 5

Okay. Let me get just a last question briefly and this is kind of audit function questions around Company, I know there's a material weakness in the K. Can you do describe the issue a little bit?

Speaker 2

Yes. It's Primarily a balance sheet issue, there was some whip that should have been classified as long term assets versus inventory. And that was the biggest and there was some primarily it was engine and compressor build parts, Stuff being built, that was classified wrong. There's also some vehicle and software expenses They rounded out, but the majority were compressor components and costs that just for me were just misclassified on the balance

Speaker 5

But you did I think you mentioned in other places you have brought in accounting consultants to Is that partially to address at least partially to address these issues?

Speaker 2

Yes, to help us. Well, The issues were addressed by our auditors and our own personnel. We did employ an accounting consultant to help us You'll write up some clearly write up some findings. We thought it was better for a third party to Throughout the findings for the SEC and the K to put them a little more detail and succinctly in there. So that was the extent of the accounting Consulting, we used on that primarily to help us clearly define exactly what it was.

Speaker 2

But we along with our ROEs had found it.

Speaker 5

Note also your earnings were delayed, your call was rescheduled to this morning. This is the second time this has happened in the last Can you talk to me about why the earnings were delayed?

Speaker 2

It's primarily just the transitions Going on, yes, we've got an interim CFO in. And then With the earnings and everything, we had to essentially have Moss Adams come back in and attest to That's fine. So anytime you switch auditors, which we did last year, the prior auditors have some review responsibility on that. So That took a the whole process took a little longer than we had anticipated. And So we held off the call.

Speaker 2

I think we announced 10 days ago or so, we held off to make sure everything was done. Obviously, Friday was the deadline for the case, so we went ahead and put that out in the earnings and then have the call of the day. So it was a lot of Transition and then just working through some of the issues that showed up in material weakness and plus 2 sets of auditors helping us.

Speaker 5

Yes. Okay. So basically the resignation of Moss Adams was a factor in this delay?

Speaker 2

Well, only from the point that they had to come back in and review And attest to what they had done because they were part of last year.

Speaker 5

Yes. I'm saying the fact that they weren't the Audra, you got Transition here, they resigned. So going through all that transition plus not having a full time CFO, that's an impact.

Speaker 2

Yes, sir. Definitely.

Speaker 5

Okay. All right, Steve. Thanks for taking all my questions. I appreciate it.

Speaker 2

Okay. Thanks, Josh.

Operator

Our next question comes from Hale Hoch from Hoch and Company. Please go ahead. Your line is open.

Speaker 5

Hi, Steve. How are you?

Speaker 2

Hey, all good. You?

Speaker 6

Doing well. Thanks. I know this whole transition of your retirements Kind of dragged on longer than you wanted and been a little messier than you wanted. But I appreciate you stepping back in and seeing it through. I'm curious, it seems like there's so much going on at the company.

Speaker 6

As the prior caller mentioned, you've Spent almost a year entire market cap and CapEx. And as it relates to that, if you're spending $150,000,000 of CapEx Between 20222023, and I'm using round numbers. And I know you're hesitant to give guidance, which I totally appreciate. But Is there any kind of directional numbers that you want us to think about on paybacks? I know when John Chisholm was involved, I think he was talking about Kind of 5 year paybacks or 20% returns.

Speaker 6

I mean, can we think of this $150,000,000 of CapEx over 2 years, Adding $30,000,000 of incremental EBITDA once it's all up and running or is there any range you're willing to give us?

Speaker 2

Yes. And the returns we are looking at You're in the right ballpark. We're looking at a 5 to 6 year, depending on the equipment, 5 to 6 year cash on cash paybacks. Some are a little higher, but none of them are below the 15% to 20% range and some of them are up into the 20% to 25% range. So the returns look good.

Speaker 2

From an EBITDA standpoint, again, we start towing the line of giving guidance or For projections, but I think the you'll see EBITDA returns in line with what that, the 5 to 6 year payout It shows up too. So if you can look at that CapEx, I think You'll be able to take that CapEx number and look at that 5 to 6 year payback and be pretty close to what we think EBITDA is going to be.

Speaker 6

All right. Thanks. And I guess getting back to your transition, there's Obviously, a CEO search going on, but there's also some new directors being proposed. It seems Probable possible to probable to me that you have a different looking Board in the next 3 months. It seems fair and reasonable to me that those potential new directors should have some input on Who your new CEO is?

Speaker 6

Are you willing to stick around for 3 to 6 more months and let the Board vote occur before a new CEO Committed by potentially a smaller and bolder board or the existing board?

Speaker 2

Well, certainly from the same perspective that I Step back in when John need to step down. I've got a as I've remind people a couple of times, I've got a pretty good Stake in the company, I own over 5% myself. So I'm intimately and intricately And how the company operates and the returns given and certainly the value derived through Share price.

Speaker 5

So I

Speaker 2

serve at the pleasure of the Board, and I would serve longer at the pleasure of the Board if need be. Yes, I'm not going to my agreement ends June 30, and At that point, per the agreement, the CEO and President Duties would transition. They could transition earlier too depending on what the search finds. But that would be the the agreement shows that as last date. But If the company and the Board deemed it necessary, I'm not disconnecting my phone on July 1.

Speaker 2

This is obviously, I've been with the company a long time. We feel like we've built a pretty solid foundation of stuff and looks like we're at a Pretty good jumping off point on some of this stuff. So no, I'm I serve at the pleasure of the Board either You're moving out or staying in whatever circumstance maybe that the Board determines as best?

Speaker 6

Well, the Board serves at the Pleasure of the shareholders and you're an extremely large shareholder and our firm is your largest shareholder. And I would love to see you stick around and let the new Board shake out. I mean, it's quite Possible or probable that there is 2 new directors at it. And I think that those people should have input on the CEO. So That's important to me.

Speaker 6

And if the current Board tries to ram through a new CEO before the Annual Meeting, I'd be extremely disappointed.

Speaker 5

Yes.

Speaker 2

And I appreciate your comments and your Confidence, as you say, being a large shareholder myself, my duty would be to address shareholder concerns and enhance shareholder value Just like you're wanting as being the largest shareholder and certainly as Justin would like to. So again, whatever Whoever ends up on the Board and I think the present Board has got nominations To come and whoever else might be added to it, certainly I'm all for whatever we need to do to enhance the value of the company and contribute to the growth going forward.

Speaker 6

Well, I appreciate your flexibility as always and thanks for your hard work.

Speaker 2

Okay. Thanks, Haile.

Operator

We have no further questions. I would like to turn the call back over to Steve Taylor for closing remarks.

Speaker 2

Okay. Well, I appreciate everybody dialing in and the questions. As I just mentioned, I think we've got a good base to build from. We've got a lot of opportunity coming up. Obviously, some things are different.

Speaker 2

We're going transitions. We've got a bank line we need to utilize and use and certainly we need to deliver the returns that That demands and entails. And I think we'll have a good year going forward. And of course, I'll provide updates on our progress In the next Q1 call. So thanks again to everybody and enjoy your day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Natural Gas Services Group Q4 2022
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