NATURAL GAS SERVICES GROUP INC

Previous wording

We rent, operate and maintain, as well as sell natural gas compressors and related equipment. We also design, fabricate and manufacture compressor units both for sale and rental to our customers. Some fabrication work is done in-house with an increasing amount done by third-party contractors. Our primary focus is on the rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 60 months, with our larger horsepower units having longer initial terms than our small and medium horsepower units. After the initial term of our rental contracts, most of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are billed monthly in advance and include maintenance of the rented compressors. As of March 31, 2024, we had 1,245 natural gas compressors totaling 444,220 horsepower rented to 80 customers compared to 1,245 natural gas compressors totaling 335,314 horsepower rented to 74 customers at March 31, 2023.

Current wording

We design, rent, sell, service and maintain natural gas compressors for oil and natural gas production and plant facilities, generally using equipment from third-party fabricators and OEM suppliers along with limited in-house assembly. Some assembly work is done in-house with an increasing amount done by third-party contractors. Our primary focus is on the rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 60 months, with our larger horsepower units having longer initial terms than our small and medium horsepower units. After the initial term of our rental contracts, most of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are billed monthly in advance and include maintenance of the rented compressors. As of June 30, 2024, we had 1,242 natural gas compressors totaling 454,568 horsepower rented to 73 customers compared to 1,249 natural gas compressors totaling 372,596 horsepower rented to 75 customers at June 30, 2023. The decline in the number of rented units and customers as of June 30, 2024 from the previous year is consistent with our strategy to move more toward rental of high horsepower compression units.

Previous wording

We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications dictated by well pressures, production characteristics and particular applications for which compression is sought. Fabrication of compressors involves our purchase of engines, compressors, coolers and other components, and our assembling of these components on skids for delivery to customer locations. These major components of our compressors are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently requires a minimum three to twelve month lead time with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available. Finally due to supply chain disruptions as a result of the COVID-19 pandemic, the Russian invasion of the Ukraine and the increased rate of inflation, we continue to experience cost increases and sporadic unavailability of many of our parts needed to fabricate and maintain our rental fleet. While we have a robust supplier network, pricing pressure from our customers and competitors may present challenges in increasing our rental rates to offset these increased costs which could have a material adverse effect on the results of our operations and financial condition, particularly if we were unable to increase our rental rates and sales prices proportionate to any such component price increases. We also use third-party contractors for fabrication and these companies may experience the same risks.

Current wording

We also design natural gas compressors for sale to our customers to meet unique specifications dictated by well pressures, production characteristics and particular applications for which compression is sought. Fabrication of compressors involves our purchase of engines, compressors, coolers and other components, and our assembling of these components on skids for delivery to customer locations. These major components of our compressors are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently requires a minimum three to twelve month lead time with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available. Finally due to supply chain disruptions and the increased rate of inflation over recent years, we continue to experience cost increases and sporadic unavailability of many of our parts needed to fabricate and maintain our rental fleet. While we have a robust supplier network, pricing pressure from our customers and competitors may present challenges in increasing our rental rates to offset these increased costs which could have a material adverse effect on the results of our operations and financial condition, particularly if we were unable to increase our rental rates and sales prices proportionate to any such component price increases. We primarily use third-party contractors for fabrication and these companies may experience the same risks.

Previous wording

In December 2023, we decided to cease fabrication of new compressor units for sale or rental to customers at our Midland, Texas facility. We continue to maintain new unit compressor fabrication capability at our Tulsa, Oklahoma facility as well as having relationships with multiple outsourced compressor fabrication providers.

Current wording

In December 2023, we decided to cease fabrication of new compressor units for sale or rental to customers at our Midland, Texas facility. We continue to maintain limited new unit compressor assembly capability at our Tulsa, Oklahoma facility as well as having relationships with multiple outsourced compressor fabrication providers.

Previous wording

We also manufacture a line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line. We use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators. Although we have significantly de-emphasized our flare product line, we continue to hold a limited inventory of flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.

Current wording

We also design and assemble a line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line. We use finished CiP component products in the assembly of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators. Although we have significantly de-emphasized our flare product line, we continue to hold a limited inventory of flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.

Previous wording

We typically experience a decline in demand during periods of low crude oil and natural gas prices. In recent years, our level of activity has become more largely driven by the price of crude oil as opposed to natural gas. During the first quarter of 2020, due to COVID, we saw a substantial decline in the prices for oil and natural gas. While prices largely recovered in 2021 and then stabilized more recently, activity levels of exploration and production companies have been and will continue to be dependent not only on commodity prices, but also on their ability to generate sufficient operational cash flow to fund their activities. Generally, we feel that the level of demand for our compressor services is more closely tied to production activities, which are likely to fare better than drilling activity in periods of declining commodity prices.

Current wording

We typically experience a decline in demand during periods of low crude oil and natural gas prices. In recent years, our level of activity has become more largely driven by the price of crude oil as opposed to natural gas. During the first quarter of 2020, due to COVID, we saw a substantial decline in the prices for oil and natural gas. While prices largely recovered in 2021 and then stabilized more recently, activity levels of exploration and production companies have been and will continue to be dependent not only on commodity prices, but also on their ability to generate sufficient operational cash flow to fund their activities. Generally, we believe that the level of demand for our compressor services is more closely tied to production activities, which are likely to fare better than drilling activity in periods of declining commodity prices.

Previous wording

For fiscal year 2024, our forecasted capital expenditures will be directly dependent upon our customers’ compression requirements and our capital availability, while maintaining prudent levels of debt. We believe that cash on hand, cash flows from operations and borrowings under our revolving credit facility will be sufficient to satisfy our capital and liquidity requirements through 2024. If we require additional capital to fund any significant unanticipated expenditures, including any material acquisitions of other businesses, joint ventures or other opportunities, this additional capital could exceed our current resources, might not be available to us when we need it, or might not be on acceptable terms.

Current wording

For fiscal year 2024, our forecasted capital expenditures will be directly dependent upon our customers’ compression requirements and our capital availability, while maintaining prudent levels of debt. We believe that cash on hand, cash flows from operations and borrowings under our revolving credit facility will be sufficient to satisfy our capital and liquidity requirements through 2024. If we require additional capital to fund any significant unanticipated expenditures, including any material acquisitions of other businesses, joint ventures or other opportunities, this additional capital could exceed our current resources, might not be available to us when we need it, or might not be available on acceptable terms.

Previous wording

We typically experience a decline in demand during periods of low crude oil and natural gas prices. During the first quarter of 2020, we saw a substantial decline in the prices for oil and natural gas. Commodity prices stabilized somewhat during 2021 and increased in the first half of 2022 and declined in the second half of 2022 but have remained relatively stable since that time. Historically, activity levels of exploration and production companies have been dependent on commodity prices. However, recent capital market focus on cash returns from exploration and production companies has restricted capital spending below levels that have historically been observed during higher commodity price environments. Generally, though, we believe that production activities (in which we are involved) will fare better than drilling activity. This is reflected in both the stability of our rental revenues, which is driven by production activities, and the volatility of our compressor sales, which tends to fluctuate with customers' capital allocations. As such, we still expect compressor sales to be low for the foreseeable future, as exploration and production companies have elected to rent compression units rather than allocating capital dollars to purchase new compression. Accordingly, we have chosen to deemphasize the new unit fabrication portion of our business and instead focus our efforts on our rental business.

Current wording

Crude oil prices have remained relatively stable since 2022. Historically, activity levels of exploration and production companies have been dependent on commodity prices. However, recent capital market focus on cash returns from exploration and production companies has restricted capital spending below levels that have historically been observed during higher commodity price environments. Generally, though, we believe that production activities (in which we are involved) will fare better than drilling activity, which tend to decline during times of lower crude oil and natural gas prices. This is reflected in both the stability of our rental revenues, which is driven by production activities, and the volatility of our compressor sales, which tends to fluctuate with customers' capital allocations. As such, we still expect compressor sales to be low for the foreseeable future, as exploration and production companies have elected to rent compression units rather than allocating capital dollars to purchase new compression. Accordingly, we have chosen to deemphasize the new unit fabrication portion of our business and instead focus our efforts on our rental business.

Previous wording

Total revenue increased 38.6% to $36.9 million for the three months ended March 31, 2024 compared to $26.6 million for the three months ended March 31, 2023. This increase was primarily a result of higher rental revenue (48.5% increase) during 2024.

Current wording

Total revenue increased 42.8% to $38.5 million for the three months ended June 30, 2024 compared to $27.0 million for the three months ended June 30, 2023. This increase was primarily a result of higher rental revenue (44.9% increase) during 2024.

Previous wording

Rental revenue increased to $33.7 million for the three months ended March 31, 2024 compared to $22.7 million for the same period in 2023. This increase during the first quarter of 2024 was attributable to an increase in high horsepower compression rentals and rate increases.

Current wording

Rental revenue increased to $34.9 million for the three months ended June 30, 2024 compared to $24.1 million for the same period in 2023. This increase during the second quarter of 2024 was attributable to an increase rented horsepower, especially high horsepower compression, as well as selective rental rate increases.

Previous wording

As of March 31, 2024, we had 1,894 compressor packages in our fleet, up from 1,875 units at March 31, 2023 due to the additional of high horsepower units during 2023 partially offset by the retirement of units during the fourth quarter of 2023 and the disposition of a small number of compressors from the fleet during this year. The Company's total unit horsepower increased to 542,256 horsepower at March 31, 2024 compared to 433,013 horsepower at March 31, 2023, due to additions to the Company's fleet of 78 high horsepower compressors over the past 12 months. As of March 31, 2024, we had 1,245 natural gas compressors with a total of 444,220 horsepower rented to 80 customers, compared to 1,245 natural gas compressors with a total of 335,314 horsepower rented to 74 customers as of March 31, 2023. As a result of the addition of high horsepower units during 2023 and these units being rented to customers, our total rented horsepower as of March 31, 2024 increased by 32.5% over the last twelve months. Our rental fleet had unit utilization as of March 31, 2024, and 2023, respectively, of 65.7% and 66.4%, and our horsepower utilization for the same dates increased to 81.9% from 77.4%. Our total rented horsepower increased by 32.5% contrasted against a flat number of total rented units. This illustrates the growing demand for our high horsepower units while the demand for our smaller and medium horsepower units has remained relatively constant over this time period.

Current wording

As of June 30, 2024, we had 1,899 compressor packages in our fleet, down from 1,911 units at June 30, 2023 due to the retirement of units during the fourth quarter of 2023 and the disposition of a small number of compressor units, partially offset by the of new fleet additions over the last twelve months. The Company's total unit horsepower increased to 552,599 horsepower at June 30, 2024 compared to 473,884 horsepower at June 30, 2023, due to additions to the Company's fleet of 55 high horsepower compressors over the past 12 months. As of June 30, 2024, we had 1,242 natural gas compressors with a total of 454,568 horsepower rented to 73 customers, compared to 1,249 natural gas compressors with a total of 372,596 horsepower rented to 75 customers as of June 30, 2023. As a result of the addition of high horsepower units during 2023 and these units being rented to customers, our total rented horsepower as of June 30, 2024 increased by 22.0% over the last twelve months. Our rental fleet had unit utilization as of June 30, 2024, and 2023, respectively, of 65.4% and 65.4%, and our horsepower utilization for the same dates increased to 82.3% from 78.6%. Our total rented horsepower increased by 22.0% contrasted against a small decrease in the number of total rented units. This illustrates the growing demand for our high horsepower units while the demand for our smaller and medium horsepower units has remained relatively constant over this time period.

Previous wording

Sales revenue decreased(16.3)% to $2.5 million for the three months ended March 31, 2024 compared to $3.0 million for the three months ended March 31, 2023. This decrease is primarily attributable to lower compressor sales during the first quarter of 2024 compared to the same period in 2023. Sales are subject to fluctuations in timing of industry activity related to our customers' capital projects and, as such, can vary substantially between periods and due in part to this, we have decided to shift the focus of our business away from sales of new compressor packages to renting our owned units to our customers.

Current wording

Sales revenue increased 42.3% to $2.3 million for the three months ended June 30, 2024 compared to $1.6 million for the three months ended June 30, 2023. This increase is primarily attributable to higher parts sales during the second quarter of 2024 compared to the same period in 2023. Sales are subject to fluctuations in timing of industry activity related to our customers' capital projects and, as such, can vary substantially between periods and due in part to this, we have decided to shift the focus of our business away from sales of new compressor packages to renting our owned units to our customers.

Previous wording

Aftermarket service revenue decreased 26.0% to $0.7 million for the three months ended March 31, 2024 compared to $0.9 million for the three months ended March 31, 2023. This decrease is primarily attributable to lower revenue from commissioning of new units during the three months ended March 31, 2024 compared to the same quarter in the previous year.

Current wording

Aftermarket service revenue increased 3.0% to $1.3 million for the three months ended June 30, 2024 compared to $1.3 million for the three months ended June 30, 2023. This increase is primarily attributable to slightly more revenue from commissioning of new units during the three months ended June 30, 2024 compared to the same quarter in the previous year.

Previous wording

Cost of rentals increased to $13.1 million during the three months ended March 31, 2024 compared to $11.6 million during the three months ended March 31, 2023. This 12.6% increase in costs of rentals is primarily due to more rented horsepower during the first quarter of 2024.

Current wording

Cost of rentals increased to $14.2 million during the three months ended June 30, 2024 compared to $11.3 million during the three months ended June 30, 2023. This 25.4% increase in costs of rentals is primarily due to more rented horsepower during the second quarter of 2024.

Previous wording

Cost of sales decreased 32.7% to $2.2 million during the three months ended March 31, 2024 compared to $3.2 million during the three months ended March 31, 2023. This decrease was primarily due to lower sales activity.

Current wording

Cost of sales increased 19.9% to $2.2 million during the three months ended June 30, 2024 compared to $1.9 million during the three months ended June 30, 2023. This increase was primarily due to higher sales activity.

Previous wording

Selling, general, and administrative ("SG&A") expenses increased 3.1% to $4.7 million for the three months ended March 31, 2024 compared $4.6 million during the same period in 2023. SG&A increased due to higher consulting and health insurance expenses partially offset by lower legal fees.

Current wording

Selling, general, and administrative ("SG&A") expenses decreased 1.4% to $4.8 million for the three months ended June 30, 2024 compared $4.9 million during the same period in 2023. SG&A decreased due to lower stock compensation expense and legal fees largely offset by higher salaries, commissions, consulting expenses and public company costs.

Previous wording

Depreciation and amortization expense increased to $7.1 million for the three months ended March 31, 2024 compared to $6.2 million for the three months ended March 31, 2023, due to depreciation expense for high horsepower units acquired during 2023.

Current wording

Depreciation and amortization expense increased to $7.7 million for the three months ended June 30, 2024 compared to $6.4 million for the three months ended June 30, 2023, due to depreciation expense for high horsepower units acquired during 2023 and 2024.

Previous wording

We recorded an income tax expense of approximately $1.5 million for the three months ended March 31, 2024 compared to an income tax expense of $0.2 million for the three months ended March 31, 2023. For interim periods, our income tax expense is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods. Our estimated annual effective tax rate differs from the U.S. federal statutory rate of 21% primarily as a result of certain expenses not being deductible for income tax purposes.

Current wording

We recorded an income tax expense of approximately $1.3 million for the three months ended June 30, 2024 compared to an income tax expense of $0.2 million for the three months ended June 30, 2023. For interim periods, our income tax expense is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods. Our estimated annual effective tax rate differs from the U.S. federal statutory rate of 21% primarily as a result of certain expenses not being deductible for income tax purposes.

Previous wording

There are other material limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies. Please read the table below under “Reconciliation” to see how Adjusted EBITDA reconciles to our net (loss) income, for the three months ended and the nine months ended March 31, 2024 and 2023, the most directly comparable GAAP financial measure.

Current wording

There are other material limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies. Please read the table below under “Reconciliation” to see how Adjusted EBITDA reconciles to our net (loss) income, for the three months ended and the six months ended June 30, 2024 and 2023, the most directly comparable GAAP financial measure.

Previous wording

For the three months ended March 31, 2024, Adjusted EBITDA increased $9.1 million, or 116.8%, due primarily to an$11.0 million increase in rental revenues partially offset by a $1.5 million increase in costs of rentals.

Current wording

For the three months ended June 30, 2024, Adjusted EBITDA increased $6.6 million, or 66.6%, due primarily to a$10.8 million increase in rental revenues partially offset by a $2.9 million increase in costs of rentals. For the six months ended June 30, 2024, Adjusted EBITDA increased $15.7 million, or 88.8%, due primarily to a $21.8 million increase in rental revenues partially offset by a $4.4 million increase in costs of rentals.

Previous wording

For the three months ended March 31, 2024, we invested $10.9 million in rental equipment and other equipment by adding approximately $10.9 million in new equipment to our rental fleet and less than $0.1 million primarily in other machinery and equipment. Our investment in rental equipment and other equipment also includes any changes to work-in-process related to our rental fleet jobs at the beginning of the period compared to the end of the period. Our rental work-in-process increased by $7.6 million during the three months ended March 31, 2024. We financed our investment in rental equipment, property and other equipment with cash flow from operations, and borrowings under our Amended and Restated Credit Facility. We anticipate that our cash flows from operations as well as our borrowing capacity under our Amended and Restated Credit Agreement will provide adequate liquidity for our planned capital expenditures during the remainder of 2024. For any new capital expenditures in 2024 and beyond that exceeds our cash flow from operations and our borrowing base under our Amended and Restated Credit Agreement, we anticipate that we would need to negotiate an expansion of our borrowing capacity under our Amended and Restated Credit Agreement or raise money in the capital markets through sales of equity or debt securities. While we control the timing and extent of our capital expenditures, there is no assurance that any such borrowing expansion would be granted. At March 31, 2024 we had approximately $46.1 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

Current wording

For the six months ended June 30, 2024, we invested $28.3 million in rental equipment and other equipment by adding approximately $28.2 million in new equipment to our rental fleet and less than $0.1 million primarily in other machinery and equipment. Our investment in rental equipment and other equipment also includes any changes to work-in-process related to our rental fleet jobs at the beginning of the period compared to the end of the period. Our rental work-in-process decreased by $2.2 million during the six months ended June 30, 2024. We financed our investment in rental equipment, property and other equipment with cash flow from operations, and borrowings under our Amended and Restated Credit Facility. We anticipate that our cash flows from operations as well as our borrowing capacity under our Amended and Restated Credit Agreement will provide adequate liquidity for our planned capital expenditures during the remainder of 2024. For any new capital expenditures in 2024 and beyond that exceeds our cash flow from operations and our borrowing base under our Amended and Restated Credit Agreement, we anticipate that we would need to negotiate an expansion of our borrowing capacity under our Amended and Restated Credit Agreement or raise money in the capital markets through sales of equity or debt securities. While we control the timing and extent of our capital expenditures, there is no assurance that any such borrowing expansion would be granted. At June 30, 2024 we had approximately $119.7 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

Previous wording

At March 31, 2024, we had cash and cash equivalents of $5.2 million compared to $2.7 million at December 31, 2023. Our cash flows from operating activities of $5.6 million were offset by capital expenditures of $10.9 million during the three months ended March 31, 2024. We had working capital of $54.4 million at March 31, 2024 compared to $43.6 million at December 31, 2023. We generated cash flows from operating activities of $5.6 million during the first three months of 2024 compared to cash flows provided by operating activities of $18.2 million for the first three months of 2023.

Current wording

At June 30, 2024, we had cash and cash equivalents of $3.6 million compared to $2.7 million at December 31, 2023. Our cash flows from operating activities of $31.1 million were offset by capital expenditures of $28.3 million during the six months ended June 30, 2024. We had working capital of $40.3 million at June 30, 2024 compared to $43.6 million at December 31, 2023. We generated cash flows from operating activities of $31.1 million during the first six months of 2024 compared to cash flows provided by operating activities of $22.6 million for the first six months of 2023.

Previous wording

Except for historical information contained herein, the statements in this report are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; a prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our products and services; and new governmental safety, health and environmental regulations, which could require us to make significant capital expenditures. The forward-looking statements included in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these and other risk factors is included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC.

Current wording

Except for historical information contained herein, the statements in this report are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks include, among other things, (i) achieving increased utilization of assets, including rental fleet utilization and unlocking other non-cash balance sheet assets; (ii) failure of projected organic growth due to adverse changes in the oil and gas industry, including depressed oil and gas prices, oppressive environmental regulations and competition; (iii) inability to finance capital expenditures; (iv) adverse changes in customer, employee or supplier relationships; (v) adverse regional and national economic and financial market conditions, including in our key operating areas; (vi) impacts of world events, including pandemics; the financial condition of the Company’s customers and failure of significant customers to perform their contractual obligations; (vii) the Company’s ability to economically develop and deploy new technologies and services, including technology to comply with health and environmental laws and regulations; (viii) failure to achieve accretive financial results in connection with any acquisitions the Company may make (ix) the loss of market share through competition or otherwise, including the introduction of competing technologies by other companies; and (x) prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our products and services. The forward-looking statements included in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these and other risk factors is included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC.