Natural Gas Services Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 2, 2024

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Incorporated Quarter 4 Earnings Call. At this time, all participants are in listen only mode. I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Speaker 1

Thank you, Luke, and good morning, everyone. Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward looking statements within the meaning of federal securities laws. Investors are cautioned that forward looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in the forward looking statements. Finally, the company can give no assurance that such forward looking statements will prove to be correct. Natural Gas Services Group disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise.

Speaker 1

Accordingly, you should not place undue reliance on forward looking statements. These and other risks are described in yesterday's press release and in our filings with the SEC, including our annual report on Form 10 ks for the year ended December 31, 2023. These documents can be found in the Investors section of our website located at www.ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. In addition, our discussion today will reflect certain non GAAP financial measures, including EBITDA, adjusted EBITDA and adjusted gross margin, among others.

Speaker 1

For reconciliations of these non GAAP financial measures to the most directly comparable measures under GAAP, please see yesterday's earnings release. I will now turn the call over to Justin Jacobs, our Chief Executive Officer. Justin?

Speaker 2

Thank you, Anna, and good morning, everyone. Welcome to our Q4 2023 earnings conference call. Thank you for joining us this morning. We appreciate your interest in Natural Gas Services Group. I'll start by introducing the team.

Speaker 2

Joining me on the call this morning is Brian Tucker, our President and Chief Operating Officer Jim Hazlett, our Chief Technical Officer John Bittner, our Interim Chief Financial Officer and Steve Taylor, the Chairman of our Board of Directors. As Steve was our longtime CEO and Interim CEO last year, I asked Steve to start us off with some thoughts on the quarter and the year. After that, John will review the quarter year in detail, and then I will finish our prepared remarks with thoughts on the current state of the business, our updated guidance and our growth strategy going forward. We will conclude with a question and answer session. Before turning it to Steve, I wanted to take a second to share with all shareholders my appreciation for the 1st rate approach Steve has taken during his transition.

Speaker 2

He has been an invaluable resource for me and the team and a welcome presence in the office. As one of our largest shareholders, he is well aligned to continue to drive significant value for all shareholders. And from my perspective, he is, as the thing goes, walking the walk. Thank you, Steve, and the floor is yours.

Speaker 3

Thanks, Justin. I appreciate the kind words and want to assure everyone listening that my feeling is mutual. We have a great management team in place and it's been my pleasure to work with them. I won't take long because I think the results speak for themselves. 2023 was a record year for revenue and EBITDA among other items.

Speaker 3

And as we look at this year and particularly this quarter, we're happy with almost every aspect of our performance. But as we talk about our successful bank funding throughout the year, our ability to obtain pre contracted work of long duration at excellent rates or the operational and environmental technology we are increasingly incorporating into our equipment, there are many areas to be happy with. We were especially proud of those items that we have accomplished that we can continue to build on in the future. Among them are the continued successful execution of our high horsepower strategy that has well established us in the 1500 horsepower market and has moved us into the 2,500 horsepower realm. Our ability to secure additional blue chip customers, they'll contribute to our growth in the future.

Speaker 3

And our safety performance that resulted in 0 workplace incidents among our employees in 2023. I see these as legacy initiatives that we can continue to build on into the future. Whether you look at the recent Q4 or the full year, the company exhibited exceptional growth and results in 2023. I'm not going to recite road numbers, John will go through those, but I will note that any time you have a year that exhibits 40% to 50% year over year growth in rental revenue, rental adjusted gross margin and total EBITDA, it's a hell of a year. I'll distill all this into the company's ability to identify opportunities and execute on them.

Speaker 3

We have many opportunities ahead and our management team, led by Justin Jacobs as CEO is well positioned and possess the ability to continue the company's growth. As Chairman and as a significant shareholder, I have great confidence in our employees and our management team to continue our success. I'll leave you with one final comment, which is the title of a song from 1986, The Future is So Bright, I Got to Wear Shades. Now, I'll turn it over to John Bittner to review the quarter year in detail. John?

Speaker 4

Thank you, Steve, and good morning, everyone. To echo your comments, we had a very successful Q4 to finish a strong year. So let me jump first into review of the Q4 first and then I will get to the full year 2023 results. Total revenue for the 3 months ended December 31, 20 23 increased to $36,200,000 which was up $13,700,000 or 61 percent from $22,500,000 in Q4 2022. Our revenue was up 15.5% from $31,400,000 for the 3 months ended September 30, 2023.

Speaker 4

Rental revenue for Q4 2023 was up $31,600,000 up from $20,600,000 in Q4 2022 for a 54% increase year over year and up $3,900,000 from $27,700,000 in Q3 2023, a 14% increase. Our sales revenue for Q4 2023 was $2,900,000 up $1,600,000 or 125 percent from $1,300,000 in Q4 2022 and up $1,500,000 from Q3 2023 for 107% increase. Aftermarket services, our AMS revenue was $1,700,000 for Q4 2023, which was up $1,000,000 or 153 percent for the same quarter in 2022 and down by approximately $600,000 sequentially, a 26% decrease. Our adjusted total gross margin of $20,300,000 in the Q4 of 2020 3 increased approximately 89% when compared to $10,700,000 in the same period in 2022. Sequentially, adjusted total gross margin dollars increased 39% from $14,600,000 last quarter.

Speaker 4

Adjusted gross margin as a percent of sales for Q4 2023 was 55.9% versus 47.6% for Q4 202246.4% in Q3 2023. This material increase in our margin percent was driven primarily by rental adjusted gross margins. Our rental adjusted gross margin dollars increased year over year to $19,200,000 in Q4 2023 from $11,300,000 in Q4 2022, representing a 70% increase. Sequentially, rental adjusted gross margin dollars increased from $14,200,000 or a 35% increase. Our rental adjusted gross margin as a percent of sales for Q4 2023 was 60.7% versus 54.8% for Q4 2022 51.4% in Q3 2023.

Speaker 4

Our rental adjusted gross margin was higher than we expected in Q4, primarily due to lower than expected labor, parts and oil expense. Our expectation is that rental adjusted gross margins going forward will be somewhere between what we experienced in Q3 and Q4 as we indicated our expectation for Q4 on the Q3 earnings call. Adjusted gross margin dollars for our sales revenue increased year over year by $1,600,000 to $2,900,000 in Q4, an increase of 125% and increased by 107% sequentially. Adjusted gross margin as a percent of revenue per sales was 21.2% in Q4 2023 versus a negative 65% in Q4 20 22 and a negative 7% in Q3 2023. Our AMS adjusted gross margin for Q4 2023 of 440,000 dollars represented $152,000 increase from the prior year or 53% and an increase of $35,000 or 9% from Q3 2023.

Speaker 4

AMS adjusted gross margin as a percent of revenue was 26.3% in Q4 2023 versus 45% in Q4 2022 and 18% in Q3 2023. As mentioned on last quarter's call, we've seen a significant increase in AMS revenue from historical levels beginning in Q2 2023. This increase is primarily due to pass through services that we provide to our range for our customers when installing our large horsepower units. These revenues will fluctuate with the volume of equipment set in each quarter and they carry low pass through margins, hence the decline in gross margin percentage from the prior year period. The volume of new unit sets saw the highest level of activity in Q2 and Q3 of 2023 and decreased somewhat in Q4 2023.

Speaker 4

Our Q4 2023 adjusted EBITDA was $16,300,000 compared to $7,800,000 in Q4 2022 or 110% increase year over year and a 38% sequential increase from $11,800,000 in Q3. Our Q4 2023 adjusted EBITDA benefited from our unexpected high rental adjusted gross margin and positive contribution from our sales adjusted gross margin. Pre tax operating earnings were $4,400,000 for Q4 2023, which improved from an operating loss of approximately $300,000 in Q4 2022. Our Q4 2023 operating income was down approximately $500,000 sequentially from Q3. However, it's important to note we did take one time charges of approximately $4,000,000 to increase our inventory reserve as a result of the cessation of fabrication operations at our Midland facility and additionally a charge of approximately 500 $1,000 for the retirement of idle units, both of which as disclosed in our 10 ks filed yesterday.

Speaker 4

Without these charges, our pro form a operating income would have been $8,900,000 for Q4 or a sequential increase of $4,000,000 from $4,900,000 in Q3 2023. Net income in Q4 2023 was $1,700,000 compared to a net loss Again, the Q4 net income results include the impact of the one time items discussed above. Earnings per share for Q4 2023 were $0.14 $0.13 on a basic and fully diluted basis respectively, compared to a loss of $0.05 per share for Q4 2022 and earnings of $0.18 per share in Q3 2023. On a full year basis, the total revenue for the company increased by 43% to $121,200,000 in 2023 from $84,800,000 in 20 22. Our rental revenue was also up 43 percent to $106,100,000 in 2023 from $74,500,000 in 20.22.

Speaker 4

Our sales revenue was up approximately 353 percent to $8,900,000 in 2023 from $8,600,000 in 2022. Our AMS revenue was up 240 percent to $6,100,000 in 2023 from $1,800,000 in 20.22. Our adjusted gross margin dollars increased by 53% year over year to $58,700,000 in 2023 from $38,500,000 Our adjusted gross margin for rental was $57,300,000 which was up $20,600,000 or 56 percent from 2022. Our adjusted rental gross margin as a percent of sales for 2023 was 54% compared to 49.3% in 2022. Adjusted gross margin dollars for sales were 0 in 2023 compared to a positive $918,000 in 2022, which was approximately 10.7 percent of sales.

Speaker 4

Adjusted gross margin for our AMS business was $1,400,000 for 2023 compared to $835,000 in 2022. Adjusted gross margin as a percent of revenue for AMS was 23.5 percent for the full year 2023 compared to 46.6 percent of revenue in 2022. Again, the decline in gross margin percentage was driven primarily by the increase in low pass through billings low margin pass through billings associated with the new unit sets in 2023. Our adjusted EBITDA for 2023 was $45,800,000 as compared to $29,200,000 in 2022 or 57% increase in 2023. Our operating income for 2023 was $10,500,000 as compared to approximately $400,000 for 2022.

Speaker 4

Our SG and A expense was $2,800,000 higher in 2023 as compared to 2022 at $16,500,000 in 20 20 3 versus $13,600,000 in 2022. However, our second half twenty twenty three run rate was less than our first half twenty twenty three due to some non recurring items experienced in the first half of the year. Also deducting from our operating income in 2023, We did have a non cash non recurring charge of $779,000 for an asset impairment in the 2nd quarter and the one time charges of $4,000,000 for the inventory reserve $500,000 for retirement of idle units discussed above, both of which were taken in Q4. Our net income for 2023 was $4,700,000 compared to a net loss of approximately $600,000 for the full year 2022. Our basic EPS for 2023 was $0.39 and $0.38 on a fully diluted basis compared to a net loss of $0.05 per share in 2022 for both measures.

Speaker 4

As of December 31, we had 12 47 utilized rental units, representing just over 420,000 horsepower compared to 1221 rented units, representing just over 318,000 horsepower as of December 31, 2022. We have added approximately 95,000 net horsepower to our fleet over the course of the last year, representing approximately a 22% increase in total fleet horsepower. Our total fleet size just passed over 500,000 horsepower in September and we ended the year at a total of 520,000 365 horsepower. This is up from approximately 425,000 horsepower fleet size at the end of last year. During the same period, our rented horsepower grew by over 102,000 horsepower.

Speaker 4

We ended the 4th quarter with 66 0.5% on a per unit utilization on a per unit basis and 80.8% utilization on a horsepower basis. Our revenue per horsepower increased 17% over the year, demonstrating the impact of the growth in high horsepower units and also the price increases we've been able to implement over the past year. Our total fleet as of December 31, 2023 consisted of 1876 units and roughly 520,000 horsepower or 277 horsepower per unit. Our average horsepower per unit has grown by 22% over the past year. And notably, approximately 98% of our high horsepower fleet is utilized in drawing rent currently.

Speaker 4

Turning to the balance sheet, we ended the year with $2,700,000 in cash and $164,000,000 outstanding on our amended and restated revolving credit facility. And looking at our 2 financial covenants contained in our credit agreement, our leverage ratio at the end of Q4 was 2.53 times, which was down from 2.71 times at the end of Q3. Our fixed charge coverage ratio for Q4 was 3.88 times, up from 2.78 times in Q3. So we were comfortably in compliance with both of our financial covenants as of December 31, 2023. Our accounts receivable balance as of December 31, 2023 was in excess of $39,000,000 which is elevated from normal and expected levels due primarily to a significant increase in rental activity and certain process related billing delays, which we expect to address during 2024.

Speaker 4

The net book value of our rental fleet at year end was approximately $374,000,000 We generated cash flow from operations of $18,000,000 compared to 27 $800,000 for 2022. The decrease is primarily related to the slower collections in our accounts receivable as discussed in the paragraph above. We had capital expenditures of approximately $154,000,000 during 2023 and we increased the balance on our amended and restated credit facility by $139,000,000 during 2023. With that, I will turn it back over to Justin for discussion of the current operating firm. Justin?

Speaker 2

Thank you, John. Overall, we continue to see solid demand for both our rental services and new equipment with generally attractive pricing. We see a favorable environment for potential growth over the near to medium term and believe we are well positioned to expand our market share while continuing to perform at high levels for our customers. Approximately 75% of our active fleet is located in oil and liquids oriented basins, where activity is primarily driven by crude oil prices. As such, I'll turn first to oil.

Speaker 2

On a macro level, oil prices appear to be relatively steady, which should continue to drive activity. We have reasonable confidence in the oil markets for the near term. Activity and forecast generally shows stable to increasing production levels for the near to medium term. Natural gas markets are a different story. Pricing is weak and gas oriented rigs are relatively low level.

Speaker 2

The current moratorium on future LNG facilities has likely negatively impacted sentiment about gas production, at least temporarily. Overall, I would describe the natural gas production market as unsteady. From the company perspective, we do not currently see natural gas production as a growth story, but our people are doing a good job maintaining our presence in the gas oriented areas, and we continue to profitably rent equipment in these basins. While the overall environment can be described as favorable, we will remain in a constant state of awareness that commodity markets can change to the negative in a hurry. As such, we will consistently plan our growth with an appropriate margin of safety to withstand any potential downturn.

Speaker 2

I'll turn to our 2024 outlook with an update to guidance provided on our Q3 earnings call. For a written summary of our outlook, I would point you to our earnings release filed after the market closed yesterday, and I would also remind you of the disclaimer provided at the beginning of this call, which addresses forward looking guidance. Our current outlook for 2024 adjusted EBITDA is $58,000,000 to $65,000,000 This is a material increase from the guidance provided on our quarter call. As noted in the earnings release, we believe the low end of the range represents our current view of the annualized amount of Q4 of 2023 adjusted EBITDA that is run rate or recurring. As it relates to the Q4 of 2023, there are two items to which I would draw your attention.

Speaker 2

First, we had sales adjusted gross margin of $600,000 in the 4th quarter, but for the 1st three quarters of the year, we had negative $600,000 We believe the 1st three quarters of the year are a much better forward indicator than the 4th quarter. 2nd, as John noted earlier in the call, the Q4 2023 rental adjusted gross margin of 61% exceeded our expectations. Would describe margins at that level as everything went right. Taking both of these points into account leads us to believe the low end of the range is a good approximation of the run rate adjusted EBITDA of the Q4 of 2023. I would further note that we believe there are some areas of investment required in 24.

Speaker 2

While we have not yet quantified these investments, they are focused on improving the scalability and efficiency of our operations, both in the field and corporate offices to drive material future growth. Along those lines, I'm pleased to announce that our new website went live yesterday. Although a relatively small investment, it is indicative of our intent to make sure all aspects of our business are in line with the technologically innovative equipment we provide to our customers. I would like to thank our team who made this happen. I'll move next to new unit capital expenditures.

Speaker 2

For 2024, our new unit capital expenditures expected range is $40,000,000 to $50,000,000 Of that, approximately $15,000,000 is capital to build new units from the 2023 plan that will be completed and installed in 2024. The balance is 2024 capital planned expenditures that are currently expected to be completed and installed in late 2024 and or early 2025. In terms of return on invested capital, we are targeting at least 20%. This applies to any growth capital expenditures, which I would define as new units, unit upgrades and unit conversions. This target is an average rate across our growth capital expenditures.

Speaker 2

I would also like to discuss our forward growth strategy. While each of these items will help us meet or hopefully exceed our 2024 outlook, they also reflect our long term intention to grow our revenue and cash flow. There are 4 parts to our growth strategy. Number 1, optimize the existing utilized fleet. Number 2, improve our asset utilization.

Speaker 2

Number 3, expand the rental fleet and number 4, execute accretive mergers and acquisitions. Let me describe each of these points in a little detail. 1st, optimize the existing utilized fleet. We believe there are opportunities to modestly improve the profitability of our cost inflation, along with operational efficiencies by using improved data collection and analysis to optimize our costs in labor, parts and maintenance. 2nd, improve our asset utilization.

Speaker 2

We believe we can improve the overall cash flow of the business by increasing utilization of the fleet as well as creating investable cash for non cash assets. We have a significant number of currently unutilized units. The unutilized fleet on the books as of year end 2023 has more than 600 unutilized units consisting mostly of medium and small horsepower units. We will review these unutilized units to determine where investment can improve the marketability and cash flow potential of the units. We also have a significant amount of capital tied up in non cash assets.

Speaker 2

Notable examples of this include the income tax receivable and the higher accounts receivable, which John discussed earlier. We believe these non cash assets can be monetized and invested back in the fleet at or above our target levels of return on invested capital. 3rd, expand the rental fleet. We intend to prudently increase the size of our rental fleet mainly through pre contracted agreements with our customers. We believe our future growth in this part of our strategy will be primarily driven through our placement of larger horsepower, centralized station natural gas compressors for unconventional oil production with select increases in medium horsepower units to meet customer demand beyond our existing fleet.

Speaker 2

4th, identify and execute accretive mergers and acquisitions. We believe there may be opportunities in mergers with or acquisitions of rental compression companies or related businesses providing similar services. While there is no certainty of the probability of any particular deal, we will continue to evaluate potential acquisitions, joint ventures and other opportunities that could enhance value for our shareholders. At this point, we will not provide overall growth goals for the medium to long term, nor will we provide a breakout for each of the components of the growth strategy in terms of contribution. However, it is the framework for how we intend to drive material growth over the next 3 to 5 years, and we look to provide further detail in the future.

Speaker 2

I remain optimistic as to our growth potential and look forward to delivering against that potential to drive value for our shareholders. This concludes our prepared remarks. So I will ask the operator to queue up for the question and answer portion of our call.

Speaker 5

Thank you so much, sir. Ladies and gentlemen, at this time, we will conduct a question and answer We do have some questions in the queue. Mr. Ekel, please go ahead.

Speaker 6

Thank you. Good morning. Maybe you could just talk a little bit about what takes you to the high end of your guidance of the 65?

Speaker 2

I think it's as we look at the going through the growth strategy, those items really towards the on the first point, which is optimization of the fleet and seeing what we're able to do in terms of targeted price increases, some potential improvements in operational were in the 2023 plan and that have spilled over into 2024, the timing of when those are installed.

Speaker 6

Understood. And then in terms of your CapEx, in terms of sort of the new units, can you talk about how much horsepower you're planning on adding, I guess between the 2023 carryover and into

Speaker 2

2024? I would give those numbers really just in aggregate, which is if you look at the amount of capital that we spent in 2023 and the horsepower that was added, the ratio as you look at that for 2024 will be roughly the same.

Speaker 6

Got it. Then you talked about gross margin and sort of guided to sort of between 3Q and 4Q, if I got that correct. And everything went right in Q4, understood. But can you talk about which specific parts you're seeing maybe go higher and therefore reducing your gross margin?

Speaker 2

It was really as we look at the performance in the Q4, as we said, it surpassed our expectations. And there's really no particular line item that stood out. It was really across the board with the major line items we highlighted, which are labor, parts and consumable expenses, largely oil. And so as we looked at those and looked at the performance of the machinery and just the timing, we would say that really it's kind of across the board our expectation is those will come down. So there's no particular line item that we would point to.

Speaker 2

It was really a everything went exceptionally well.

Speaker 6

Got it. And then just last one for me and then I'll turn it over. You talked about natural gas prices, and you don't really see that as being the growth story. Can you just say how much of your compression is located in those basins?

Speaker 2

Sure. So as we look at the breakout, rough numbers, 75% in oil basins and the balance, so roughly 25% in natural gas.

Speaker 6

Great. I'll take the rest offline. Thank you so much.

Speaker 2

Thank

Speaker 5

you. Thank you, sir. I will go ahead and open up again for Mr. Hughes. Mr.

Speaker 5

Hughes, please go ahead.

Speaker 7

Hello there. Yes, my name is Frank Hughes, I'm a former Director and shareholder. First, I'd like to say, Justin, congratulations on your appointment as the CEO. And Steve, congratulations on the next phase of your retirement. I think this has been this whole transition has been handled expertly.

Speaker 7

Justin, my question is for you and it's more of a personal level. Could you discuss for a minute your personal journey going from Managing Director at Mill Road to Board member at NGS to CEO? I'd appreciate understanding a little bit about that transition for you.

Speaker 2

Sure. First, thank you for the comments. I'll speak for Steve here for a second, but we appreciate that the shareholder perception is as it actually is, which has been, I think, a very constructive partnership. So appreciate the positive comments there and noting that. From a personal perspective, prior to Mill Road, I'd worked in really combination of operational role and investor, particularly in turnaround situations.

Speaker 2

And so for me, this was a little bit of going back to earlier in my career. As I looked at the opportunity with natural gas services having been on the Board and a shareholder through Mill Road for several years prior to that. I see what I believe is really some great potential. Certainly, as you look at the results over the past year, the business has grown significantly. And I think there's an opportunity to continue growth in the future for several years.

Speaker 2

And so that was a very attractive opportunity. My relationship with Steve and having been on the board gave me confidence that I'd be able to step in and really hit the ground running with a great transition. And so overall, it was just an exciting opportunity for me. And speaking with my team, our now former team at Mill Road, who were longtime friends and colleagues. They were just incredibly supportive in that opportunity and really joining one of their larger investments.

Speaker 2

And so all around, it was a great opportunity that I'm excited been able to take.

Speaker 7

Well, again, thank you very much for those comments. I've been involved with Natural Gas Services for 25 years and was initially an investor when it was still a private company. So I'm very glad to see that this managed to work out on behalf of the company and yourself. So again, thank you, Justin.

Speaker 4

Thank you.

Operator

I'm sorry. Our next question comes from Mr. Rob Brown. Go ahead.

Speaker 8

Hi, it's Rob Brown with Lake Street Capital Markets. And congratulations on all the progress.

Speaker 2

Thank you.

Operator

Let's try it again. Mr. Brown?

Speaker 8

Yes. Hi, thank you. Congratulations on all the progress. Rob Brown at Lake Street. First question is on the kind of the pricing environment.

Speaker 8

I think you alluded to some opportunities with your some of your fleet, but how is the overall pricing environment? Is the prices still continue to increase on the unit placements? And I guess how's the opportunity for pricing, I guess, in the market?

Speaker 2

Yes, I would hit that first at just a high level. And I think our comments earlier was that we're seeing both for existing units and for new units generally attractive pricing. The pricing was, I think, really driven over the past several years by significant cost inflation depending on what metrics you want to look at. But I think the general feeling is that level of inflation has moderated some, although still there. And as we look at the areas where we are largest in terms of our business, we're still seeing that labor inflation, particularly if you look at the Permian Basin, where it is still very difficult to attract people in the field.

Speaker 2

And so as we are going through our existing fleet and looking at new units, we're certainly taking a close look at pricing to say, are we able to maintain and try and improve our margin over time.

Speaker 8

Okay, great. Got it. And on the CapEx spending outlook, you've talked about sort of, I guess, some potential upside to that, I think, or I guess what drives upside to the CapEx? Are you seeing kind of customer quotes that could or customer interest that could drive upside to the CapEx or does that look pretty stable for the 2020 4 period?

Speaker 2

We're certainly seeing incremental customer demand. We haven't made any decisions around that, but that is a near term or relative near term review for us in looking at the availability and making sure we're maintaining prudent levels of leverage in the future, while also looking to capitalize on the ability to pre contract with some great customers for new units at quite attractive prices. So not something we've made a decision on yet, but it is certainly something that we're looking at and we'll update on the next quarter to the extent that our capital plan increases.

Speaker 3

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

Speaker 2

Thanks, Rob.

Speaker 5

Thank you. Thank you, Mr. Brown. Our next question comes from Tim O'Toole. Mr.

Speaker 5

O'Toole, please go ahead.

Speaker 9

Good morning. Can you hear me all right?

Speaker 2

We can hear you, Tim.

Speaker 9

Great. And as I've done in the past, and I'm first of all, welcome, Justin, and congratulations to Steve for finally retiring after a couple of drives. And we'll catch up with you offline at some point, Steve. A couple of quick questions. One is on the balance sheet, the debt level coming out of the 4th quarter at $164,000,000 We're now basically closing the books on the Q1.

Speaker 9

So I'm wondering if you could talk about kind of current debt levels. And then also, where would you target that to go in terms of some of the various ratios? Let's just say, if you're $60,000,000 to $65,000,000 of EBITDA this year, coming out of the year, absent, let's say, M and A, where would you like where would you target that ratio to be yes, coming out. And then kind of also related, I think that you have that on your debt facility that you have depending on leverage ratios varying a grid or a matrix on the spread to SOFR, where can that go? We can't really control what the Fed does in terms of short term rates and what SOFR winds up being, but that spread will relate to the coverage ratio.

Speaker 9

So could you talk about that and the leverage a little bit?

Speaker 2

Sure. And maybe I'll ask John Bittner to address the second question first just as it relates to the pricing on the

Speaker 4

interest rate. Great. So the pricing on the interest rate increases by 25 basis points when our leverage goes north of 2.75, which we are now currently below. So we are at kind of the mid tier of the grid on our pricing for more Qs, Q4 2023 and Q1 of 2024.

Speaker 2

And on the to address, Tim, your question of target levels, there isn't a specific target level that I would look at. I would say that as you look at the Q4 numbers, I think that is a level that we are very comfortable with. As we mentioned in the press release, we have a comfortable cushion on both of our financial covenants. And just in looking at the availability and modeling different scenarios into the future, whether positive or potentially negative just in terms of overall market environment, feel very comfortable with the current level. And I'm not going to, I guess, go through any projections into the future.

Speaker 2

I think we've given some guidance that you could reasonably work through and have a sense of where we are going to be on the debt side. And it's a balance for us of taking on some incremental debt to capture some potentially attractive new unit opportunities with existing customers that we could potentially grow to be larger customers for us with, I think, sentiment of some of our shareholders that they generally like where our leverage levels are, maybe they're comfortable a little bit higher and kind of balancing that for the future.

Speaker 9

Okay. So thanks for that. And then you talked also about well, I guess, I'm not sure if you said monetizing, but I'm wondering kind of what the what dials you can turn here. The AR or the accounts receivable days are obviously high. Could you maybe talk about targets on that and how many quarters it takes to kind of normalize towards those targets?

Speaker 9

And if there are any other assets and in fact I'm wondering about I guess specifically, but maybe you can broaden the discussion as well on the fab facilities. Have they been monetized or is that a process that you're pursuing at this point?

Speaker 2

Sure. So let me take I'll first go to accounts receivable. As you mentioned, our days receivable is much higher than historical. If you looked at our historical going back several years without giving a specific number, those levels are really where we're looking to get back to and we don't see any reason at this point we can't do that over the course of the year. I won't give specific kind of quarterly targets, but we're comfortable saying over the course of the year, we understand what we need to do to bring it back down to more historical levels.

Speaker 2

On the fabrication facilities, we're currently reviewing the capabilities that we need as a business to really drive the rental side. We've got some great people and some great capabilities that are necessary for us In terms of what we'll do on facilities, all of that will be driven by the capabilities that we need and that's a process that is ongoing.

Speaker 9

Okay, great. Thank you for that. Another quick question, balance sheet question is the tax receivable has been out there for quite a long time, obviously. Any quick update

Speaker 4

on that? I mean, any

Speaker 2

give other than what we put in our disclosure in terms of forward looking. I certainly will say it is at or near the top of our list of something that we would turn from a current non cash asset into a cash asset to be able to invest back in the fleet. So it's something that is right at

Speaker 10

the top of the list.

Speaker 9

Right. Yes, I'm sure it is to the extent you can actually control it. And then final area, maybe you could talk a little bit about capital allocation. Basically, all of your peers actually, I think all of your peers actually resolve not just on EBITDA, but also on discretionary cash flow, which one can back through and I do, but I think everyone kind of or many people use it in this industry as a valuation metric. And then that relates also to based on a year's discretionary cash flow, how do you allocate that capital?

Speaker 9

And is there a consideration of adding at least a modest dividend at some point visavis that capital allocation strategy, if you will?

Speaker 2

Sure. So I think you're and I look back in previous quarters and you've asked the question around discretionary cash flow. I think it's an entirely reasonable topic for us to consider of how we over time provide better understanding to our shareholders about how we're thinking about capital allocation. For that particular topic, we've given some incremental guidance in this quarter relative to what we've done in the past. And of course, Steve gave guidance for the first time on the prior quarter call.

Speaker 2

So on general capital allocation, it is a good question of which we're going to consider how we give better color to our investors over time. That's something we look to do without giving a specific timing of what we're going when we're going to do it by and exactly what we're going to do. The topic of dividend is one that the Board certainly is considering as part of overall capital allocation. Nothing specific that I would give there in terms of potential timing or any more detail than that other than to say it is clear looking at the large players that a dividend is a material part of or is likely a material part of their valuation. And I'm mindful of that and the Board is mindful.

Speaker 9

Okay, great. Thanks for all the discussion and congratulations to you both and the whole team there. Keep up the good work. Thanks.

Speaker 2

Thanks for your questions, Tim.

Speaker 5

Thank you, Mr. O'Toole. The last question looks like it comes from Tate Sullivan. Mr. Sullivan, please go ahead.

Speaker 10

Great. Thank you. I'm Tate Sullivan from Maxim Group. And Steve, great working with you and look forward to staying in touch. And I heard earlier you mentioned that, I mean, good progress we've seen moving into that 1500 horsepower market and continue to go 2,500 in your website, your new website shows how large these units are.

Speaker 10

Can you talk about the length of the rental contracts on some of the larger units going out the doors? I mean, are we talking 2 to 3 years, up to 5 years? Or can you get some context for that?

Speaker 2

Sure. For the large horsepower units, we're going to be at the high end of the range. And I think in the public disclosure, our 10 ks, we've listed those are up to 60 months in terms of contracted life.

Speaker 10

Okay. And then for can you talk about the customer mix and just your dialogue with customers so far? I mean, have you I mean, Oxy has turned into what continues to be a very important customer. Does demand keep continue from them? Are you looking to diversify a little more?

Speaker 10

And can you talk about your conversations with customers to date?

Speaker 2

Sure. We are I won't get into specific customer names. Obviously, you can see that Oxy is our largest customer and a very important customer. We are continuing to see demand from really across our customer base and even with new customers. We're mindful of diversifying our customer base really in terms of dollars so that it's not just Oxy, that's going to take some time to do.

Speaker 2

And certainly, we don't want to we want to continue to increase our business with Oxy. And so we think we have some opportunities to have a couple of additional large customers. They won't get to the size of Oxley, certainly over the short to medium term. But we're seeing opportunities there and that's part of the decision making around the capital plan.

Speaker 10

And last for me, too, the sales growth adjusted gross profit margin shifted to positive after a streak. Do you have more sales projects or can you comment in your backlog and might this be a new trend going forward in terms of the positive margin for sales of equipment?

Speaker 2

Yes. I'd go back to in our prepared remarks. We certainly were happy with the positive contribution in the Q4. But as we think about what our run rate is at the 4th quarter to apply to our 2024 outlook. On the sales, the adjusted margin, we'd really look more towards the 1st 3 quarters of the year as the go forward as opposed to the 4th quarter.

Speaker 10

Great. Thank you very much.

Speaker 5

Thank you, Mr. Sullivan. There are no more questions in queue.

Speaker 2

Great. Thank you. And thanks for all of your questions and participation on the call. We sincerely appreciate your support. And I want to thank all of our employees who did the real work to deliver these numbers for shareholders.

Speaker 2

It is sometimes a thankless job, but this is our opportunity to thank you for a job well done. I believe we are in an enviable position. Our markets are generally strong and we have customers who value our equipment and services and would like more of them. We look forward to updating you on our progress in the next quarter. Thank you.

Speaker 5

This concludes today's conference call. Thank you so much for attending.

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Earnings Conference Call
Natural Gas Services Group Q4 2023
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