NATURAL GAS SERVICES GROUP INC Q1 FY2025 earnings call

• Justin welcomed participants and introduced the team, noting the company started 2025 well with strong competitive position. - Rental revenue hit a quarterly record of $38.9 million, up 15% y-o-y and 2% q-o-q, with adjusted rental gross margin at 61.9%. - Adjusted EBITDA was $19.3 million, a record. Leverage was 2.18x. - Market conditions: macroeconomic and commodity market volatility, but business not materially impacted. LNG export growth and new pipeline projects could be tailwinds. - Strategy updates: asset utilization (improving days receivable, monetizing income tax receivable and real estate, reducing inventory), fleet expansion (signed contracts for ~90,000 horsepower, focus on large horsepower and electric motor drives), M&A (focus on organic growth and exploring accretive acquisitions, strong balance sheet and leverage position).

For the first quarter of 2025, Natural Gas Services Group reported total revenue of $41.4 million, a 12% increase over the first quarter of 2024. Rental revenue was $38.9 million, up 15% year-over-year and 2% sequentially, accounting for approximately 93.96% of total revenue. Adjusted rental gross margin was 61.9%. Adjusted EBITDA for the first quarter was $19.3 million. Rented horsepower totaled approximately 493,000, an 11% year-over-year increase. Net income for the quarter was $4.9 million or $0.38 per diluted share.

• Increased the high end of adjusted EBITDA guidance to $79 million. - Maintaining growth CapEx guidance of $95 million to $120 million, heavily weighted to the second half, alongside maintenance CapEx of $10 million to $13 million. - Target of at least 20% return on invested capital. - Rental revenue, margins and EBITDA tracking in line or ahead of plan, and expanded credit facility provides firepower for organic growth and M&A.

• Macro-economic factors and commodity markets volatility. - Tariffs with indirect effects hard to predict. If risks materialize or assumptions prove incorrect, actual results may vary materially.

Q: Morning. Thanks for calling in. First question is kind of on the current demand environment and the volatility. Obviously, it's a bit of a volatile situation. But what's sort of the indications from customers and how do you see that flowing into your conversations? Is it really timing of the '26 deployments? Or is there starting to be some pricing pressure? And just what's sort of the demand environment implications at the moment?

A: So, I would say we haven't really seen much of a change in the demand environment over the past, let's call it, 60 to -- from 90 days ago. 2025 is essentially all locked in, still having discussions with customers about 2026 growth. We have a significant number of units already contracted for delivery throughout 2026. And there remain ongoing discussions of incremental units to get contracted in 2026. And so, from the demand environment there, really haven't seen any change. It remains a strong environment. On the pricing side, no material discussions. I mean, obviously, there are always times when customers ask for a price, but there's nothing that's any different from the environment we've seen or at least I've seen since becoming CEO. So, it's really pretty consistent from where we were even 90 days ago.

Q: Hey, good morning, Justin and Ian. Justin, so maybe circling back a question on -- to follow up on that margin question. You guys have obviously kind of been hanging around the low 60% range in rentals specifically. And I'm wondering, as we go through the year and you start taking the bulk of your new deliveries, is there anything on the cost side as you kind of get prepped for those going in the field that might drag that down? Or is kind of a 60%-plus rental margin seem pretty sustainable as we go forward?

A: If you look historically for NGS, and historically, I mean, if you look over the kind of the last 5 years, as we've been setting increasing amounts of large horsepower, there have been in certain instances over that period, a temporary blip in expenses on installations. Now, sometimes that's offset with revenue, sometimes not, depends on the customer and just kind of depends -- and sometimes there's been no impact at all. It's something we're obviously closely looking at and monitoring to ensure to the greatest extent that doesn't happen. It's possible to be some, but it would be very temporary in nature, and I wouldn't expect it to be a significant impact. Could it put us to kind of the lower end of the range on what we've seen on the rental adjusted gross margin over the past six to eight quarters or probably six quarters? It could. I don't foresee anything specific today, but it's just something that we're closely looking at and it would be temporary in nature.

Q: Hi, good morning. This is Tim on for Selman. Congrats on the quarter. So, just first question, do you anticipate any of this kind of crude oil volatility to kind of bring some of the smaller compression providers to market? And then also, given some producers are trimming some of their CapEx, do you think there's potential for more outsourced compression and less in-source compression?

A: So, on the impact of crude oil prices, I think for us, that's primarily our horsepower sizes that are servicing really more crude oil wells are the large horsepower and the medium. And in terms of the small horsepower, that's driven more by natural gas prices. And as I mentioned in the prepared remarks, we're seeing some green shoots there. Nothing a trend that I would point to at this point, but I think there are some people who believe that LNG is really going to drive significantly both not just volumes, prices. Too early to tell on that, the impact of small horsepower, but I think the trend is modestly favorable at this point. In terms of the CapEx budgets, the ranges I've seen so far are kind of -- I think the low end was kind of like 2.5% decrease, up to kind of 10%, really not hitting any of the areas in their budgets that impact us. And in fact, as I've read, a number of customer releases, really a big focus on productivity, and that really plays into our strong suit in terms of the technological innovation in our units. We help drive productivity and run time for our customers. And so I think there's actually a greater focus on that. In terms of in-sourcing versus outsourcing, I think it's too early to tell on that. One would think if companies are concerned about leverage and cutting back capital, they would move more towards a renting mindset versus a buying mindset. But I think it's too early to tell on that.

Q: Can you -- did I -- just circling back to a comment from earlier, did you say the potential sale proceeds from Midland assets, the office and fabrication facility is at least $25 million decrease in receivables, did you frame it that way?

A: Yes. So, if you look at the aggregate of those 3 different areas, I mean the income tax receivable, which that amount is defined, $11 million, and then, adding in the proceeds from monetization of the real estate and inventory combined, we see that as an opportunity that's at least as large as the approximately $25 million of cash we were able to pull out of AR in 2024.