NATURAL GAS SERVICES GROUP, INC. The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed consolidated financial statements and the related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC . This report and our Annual Report on Form 10-K contain certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, and information pertaining to us, our industry and the oil and natural gas industry that is based on the beliefs of our management, as well as assumptions made by and information currently available to our management. All statements, other than statements of historical facts contained in this report as well as our Annual Report on Form 10-K, including statements regarding our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future operations, are forward-looking statements. We use the words "may," "will," "expect," "anticipate," "estimate," "believe," "continue," "intend," "plan," "budget" and other similar words to identify forward-looking statements. You should read statements that contain these words carefully and should not place undue reliance on these statements because they discuss future expectations, contain projections of results of operations or of our financial condition and/or state other "forward-looking" information. We do not undertake any obligation to update or revise publicly any forward-looking statements. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations or assumptions will prove to have been correct. Please read Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements.
Overview
We fabricate, manufacture, rent, and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts typically provide for initial terms of six to 24 months, with our larger horsepower units having contract terms of up to 60 months. After the initial term of our rental contracts, many 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 our rented compressors. As ofJune 30, 2022 , we had 1,281 natural gas compressors totaling 311,379 horsepower rented to 79 customers compared to 1,245 natural gas compressors totaling 287,365 horsepower rented to 79 customers atJune 30, 2021 . 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. The major components of our compressor packages are acquired through periodic purchase orders placed with third-party suppliers on an "as needed" basis, which presently require lead times between three to six months 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. Recent inflationary pressures have created price increases in both major and minor components for our compressors as well as longer than normal lead times for such components. To date, we have been able to increase our rental rates and sales prices proportionally; however, if cost increases continue and we are no longer able to increase our rental rates and sales prices such an event could have a material adverse effect on the results of our operations and financial condition. We also manufacture a proprietary 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. We also design, fabricate, sell, install, and service 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 ourMidland, 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.
We provide service and maintenance to our customers under written maintenance contracts or on an as-required basis in the absence of a service contract. Maintenance agreements typically have terms of six months to one year and require payment of a monthly fee.
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The oil and natural gas equipment rental and services industry is cyclical in
nature. The most critical factor in assessing the outlook for the industry is
the worldwide supply and demand for oil and natural gas and the corresponding
changes in commodity prices. As demand and prices increase, oil and natural gas
producers typically increase their capital expenditures for drilling,
development and production activities, although recent equity capital
constraints and demands from institutional investors to keep spending within
operating cash flow have meaningfully restrained capital expenditure budgets of
domestic exploration and production companies. Generally, increased capital
expenditures ultimately result in greater revenues and profits for service and
equipment companies.
In general, we expect our overall business activity and revenues to track the
level of activity in the oil and natural gas industry, with changes in crude oil
and condensate production and consumption levels and prices affecting our
business more than changes in domestic natural gas production and consumption
levels and prices. In recent years we have increased our rentals and sales in
unconventional oil shale plays, which are more dependent on crude oil prices.
With this shift towards oil production, the demand for overall compression
services and products is driven by two general factors: an increased focus by
producers on artificial lift applications, e.g., production enhancement with
compression assisted gas lift; and declining reservoir pressure in maturing
natural gas producing fields, especially unconventional production. These types
of applications have historically been serviced by wellhead size compressors,
and continue to be, but there has also been an economic move by our customers
towards centralized drilling and production facilities, which have increased the
market need for larger horsepower compressor packages. We recognized this need
in recent years and have been shifting our cash and fabrication resources
towards designing, fabricating and renting gas compressor packages that range
from 400 horsepower up to 1,500 horsepower. While this is a response to market
conditions and trends, it also provides us with the opportunity to compete as a
full-line compression provider. In addition, recent heightened focus on the
emissions profile of our customers has created a shift in demand from natural
gas powered compression to electric motor compression in areas where the
electric infrastructure can accommodate the energy demands of these units. In
response to this shift, we have announced plans to convert up to 100 compressor
packages from internal combustion engines to electric motors. The initial
conversions will focus on packages in the 200-250 horsepower range.
Industry Update
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 during 2021 with a sharp increase through the first six months of 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 feel 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 capital allocations. As such, we still expect compressor sales to be low for the remainder of 2022, as exploration and production companies have elected to rent compression units rather than allocating capital dollars to purchase new compression.
Results of Operations
Three months ended
The table below shows our revenues and percentage of total revenues of each of
our product lines for the three months ended
Three months ended June 30,
2022 2021
(in thousands)
Rental $ 18,144 91.0 % $ 15,613 88.0 %
Sales 1,292 6.5 % 1,573 8.9 %
Service and Maintenance 490 2.5 % 563 3.1 %
Total $ 19,926 $ 17,749
17-------------------------------------------------------------------------------- Total revenue increased 12.3% to$19.9 million for the three months endedJune 30, 2022 compared to$17.7 million for the three months endedJune 30, 2021 . This increase was primarily a result of higher rental revenue (16.2% increase) during 2022 partially offset by lower sales revenue (18% decrease). Rental revenue increased to$18.1 million for the three months endedJune 30, 2022 compared to$15.6 million for the same period in 2021. This increase during the second quarter of 2022 was attributable to (i) an increase in high horsepower compression rentals as these units carry a higher revenue rate than our lower horsepower units and (ii) rental rate increases across a portion of our fleet intended to offset inflationary pressures related to the costs of our rental fleet. As ofJune 30, 2022 , we had 2,043 compressor packages in our fleet, down from 2,257 units atJune 30, 2021 due to the retirement of units during the fourth quarter of 2021. The Company's total unit horsepower decreased to 426,811 horsepower atJune 30, 2022 compared to 446,803 horsepower atJune 30, 2021 , due to the aforementioned unit retirements in the fourth quarter of 2021 partially offset by the addition to the Company's fleet of 27 high horsepower compressors with 13,160 horsepower over the past 12 months. As ofJune 30, 2022 , we had 1,281 natural gas compressors with a total of 311,379 horsepower rented to 79 customers, compared to 1,245 natural gas compressors with a total of 287,365 horsepower rented to 79 customers as ofJune 30, 2021 . As a result, our total rented horsepower as ofJune 30, 2022 increased by 8.4% over the last twelve months. Our rental fleet had unit utilization as ofJune 30, 2022 , and 2021, respectively, of 62.7% and 55.2%, and our horsepower utilization for the same dates increased to 73.0% from 64.3%. Our total rented horsepower increased by 8.4% contrasted against a 2.9% increase in total rented units. This illustrates the growing demand for our high horsepower units while the demand for our smaller and medium horsepower units has not recovered in line with recent commodity price increases. Sales revenue decreased to$1.3 million for the three months endedJune 30, 2022 compared to$1.6 million for the three months endedJune 30, 2021 . This decrease is mostly attributable to decreased parts and rebuild sales partially offset by increased compressor sales during the second quarter of 2022 compared to the same period in 2021. Sales are subject to fluctuations in timing of industry activity related to our customers' capital projects and, as such, can vary substantially between periods. Cost of rentals increased to$9.2 million during the three months endedJune 30, 2022 compared to$9.1 million during the three months endedJune 30, 2021 . While rental revenues increased 16.2%, this 1.8% increase in costs of rentals is primarily due to inflationary pressures on labor and parts. While repair and maintenance expenses are customary in our business, the timing of such expenses can fluctuate between periods resulting in periods with larger than normal expenses. Cost of sales decreased 19.0% to$1.4 million during the three months endedJune 30, 2022 compared to$1.8 million during the three months endedJune 30, 2021 . This decrease was primarily due to a reduction in unabsorbed costs related to our fabrication operations during the period. Selling, general, and administrative ("SG&A") expenses decreased 11.4% to$2.3 million for the three months endedJune 30, 2022 compared$2.6 million during the same period in 2021. This decrease in SG&A expenses was primarily attributable to (i) a$392,000 decrease in our deferred compensation liability and (ii) a$188,000 decrease in restricted stock compensation expense. These decreases were partially offset by (i) a$160,000 increase in accrued bonus expense and (ii) a$147,000 increase in stock option expense. Depreciation and amortization expense decreased to$6.0 million for the three months endedJune 30, 2022 compared to$6.3 million for the three months endedJune 30, 2021 . This was the result of a reduction in our rental fleet due to unit retirements in the fourth quarter of 2021. We recorded an income tax expense of approximately$372,000 for the three months endedJune 30, 2022 compared to an income tax benefit of$339,000 for the three months endedJune 30, 2021 . For interim periods, our income tax benefit (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 theU.S. federal statutory rate of 21% primarily as a result of expenses not deductible for income tax purposes.
Six months ended
The table below shows our revenues and percentage of total revenues of each of
our product lines for the six months ended
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Six months ended June 30,
2022 2021
(in thousands)
Rental $ 35,274 87.6 % $ 30,954 85.6 %
Sales 4,184 10.4 % 4,284 11.9 %
Service and Maintenance 804 2.0 % 908 2.5 %
Total $ 40,262 $ 36,146
Total revenue increased 11.4% to $40.3 million for the six months ended June 30,
2022 compared to $36.1 million during the nine months ended June 30, 2021 . This
increase was primarily a result of higher rental revenue (14.0% increase) during
the first six months of 2022 partially offset by decreased sales revenue (2.3%
decrease).
Rental revenue increased to $35.3 million for the six months ended June 30, 2022
compared to $31.0 million during the six months ended June 30, 2021 . This
increase during the first six months of 2022 was attributable to an increase in
high horsepower compression rentals as these units carry a higher revenue rate
than our lower horsepower units and, to a lesser extent, rental rate increases
across a portion of our fleet intended to offset inflationary pressures related
to the costs of our rental fleet.
Sales revenue decreased to $4.2 million for the six months ended June 30, 2022
compared to $4.3 million for the same period in 2021. This decrease is mostly
attributable to a decrease in parts sales partially offset by an increase in
compressor sales. Sales are subject to fluctuations in timing of industry
activity related to capital projects and, as such, can vary substantially
between periods.
Cost of rentals increased 13.8% to $18.5 million during the six months ended
June 30, 2022 compared to $16.2 million during the six months ended June 30,
2021 . This increase was primarily due to inflationary pressures on labor and
parts as well as increased high horsepower units being placed into service.
While repair and maintenance expenses are customary in our business, the timing
of such expenses can fluctuate between periods resulting in periods with larger
than normal expenses.
Cost of sales decreased 21.9% to $3.4 million during the six months ended June
30, 2022 compared to $4.4 million during the six months ended June 30, 2021 .
This decrease during the first six months of 2022 was primarily due to a
decrease in parts sales.
Selling, general, and administrative expenses decreased (8.4)% to $4.8 million
for the six months ended June 30, 2022 compared to $5.3 million for the same
period in 2021. SG&A expenses during the first six months of 2022 were impacted
by a $597,000 reduction in deferred compensation and a $201,000 reduction in
restricted stock compensation expenses, partially offset by a $340,000 increase
in expected executive bonus compensation expense and officer salaries related to
the recent appointment of our interim President and Chief Executive Officer.
Depreciation and amortization expense decreased 4.1% to $12.1 million for the
six months ended June 30, 2022 compared to $12.6 million for the six months
ended June 30, 2021 . This decrease was the result of unit retirements in the
fourth quarter of 2021.
We recorded an income tax expense of $361,000 for the six months ended June 30,
2022 compared to an income tax benefit of $213,000 for the six months ended June
30, 2021 . For interim periods, our income tax benefit (expense) is computed
based upon our estimated annual effective tax rate and any discrete items that
impact the interim periods.
Non-GAAP Financial Measures
Our definition and use of Adjusted EBITDA
"Adjusted EBITDA" is a non-GAAP financial measure that we define as earnings
(net (loss) income) before interest, taxes, depreciation and amortization, as
well as non-cash stock compensation, impairment of goodwill, an increase in
inventory allowance and inventory write-offs, and retirement of rental
equipment. This term, as used and defined by us, may not be comparable to
similarly titled measures employed by other companies and is not a measure of
performance calculated in
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accordance with GAAP. Adjusted EBITDA should not be considered in isolation or
as a substitute for operating income, net income or loss, cash flows provided by
operating, investing and financing activities, or other income or cash flow
statement data prepared in accordance with GAAP. However, management believes
Adjusted EBITDA is useful to an investor in evaluating our operating performance
because:
•it is widely used by investors in the energy industry to measure a company's
operating performance without regard to items excluded from the calculation of
Adjusted EBITDA, which can vary substantially from company to company depending
upon accounting methods and book value of assets, capital structure and the
method by which assets were acquired, among other factors;
•it helps investors to more meaningfully evaluate and compare the results of our
operations from period to period by removing the impact of our capital structure
and asset base from our operating structure; and
•it is used by our management for various purposes, including as a measure of operating performance, in presentations to our Board of Directors, and as a basis for strategic planning and forecasting.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under generally accepted accounting principles. Some of these limitations are:
•Adjusted EBITDA does not reflect our cash expenditures, future requirements for capital expenditures, or contractual commitments;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA does not reflect the cash requirements necessary to service interest or principal payments on our debts; and
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any capital expenditures for such replacements.
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, the most directly comparable GAAP financial measure.
Reconciliation
The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to Adjusted EBITDA:
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
(in thousands)
Net income (loss) $ (70) $ (1,918) $ 267 $ (2,313)
Interest expense 24 14 49 16
Income tax expense (benefit) 372 (339) 361 (213)
Depreciation and amortization 6,042 6,326 12,103 12,623
Non-cash stock compensation expense 331 421 754 895
Adjusted EBITDA $ 6,699 $ 4,504 $ 13,534 $ 11,008
For the three months ended June 30, 2022 , Adjusted EBITDA increased $2.2 million
(48.7%) due primarily to a $2.2 million increase in total revenues and a $0.3
million reduction in costs of sales partially offset by a $0.2 million increase
in costs of rentals. For the six months ended June 30, 2022 , Adjusted EBITDA
increased $2.5 million (22.9%) due primarily to a $4.1 million increase in total
revenues and a $1.0 million reduction in costs of sales partially offset by a
$2.2 million increase in costs of rentals.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
Our working capital positions as ofJune 30, 2022 andDecember 31, 2021 are set forth below: June 30, December 31, 2022 2021 (in thousands) Current Assets: Cash and cash equivalents$ 9,828 $ 22,942 Trade accounts receivable, net 11,861 10,389 Inventory 18,478 19,329 Federal income tax receivable 11,538 11,538 Prepaid income taxes 41 51 Prepaid expenses and other 1,612 854 Total current assets 53,358 65,103 Current Liabilities: Accounts payable 5,238 4,795 Accrued liabilities 15,958 14,103 Line of credit - - Current operating leases 88 68 Deferred income - 1,312 Total current liabilities 21,284 20,278 Total working capital$ 32,074 $ 44,825 For the six months endedJune 30, 2022 , we invested$19.2 million in rental and property and other equipment by adding$18.8 million in new equipment to our rental fleet and$410,000 mostly in vehicles as well as various other machinery and equipment. Our investment in rental equipment, property 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$6.6 million during the six months endedJune 30, 2022 . We financed our investment in rental equipment, property and other equipment with cash flow from operations and cash on hand. We anticipate that our cash flows from operations as well as our borrowing capacity under our New Credit Agreement will provide ample liquidity for our planned capital expenditures during the remainder of 2022 and beyond.
Cash flows
AtJune 30, 2022 , we had cash and cash equivalents of$9.8 million compared to$22.9 million atDecember 31, 2021 . Our cash flows from operating activities of$13.2 million were offset by capital expenditures of$19.2 million during the six months endedJune 30, 2022 . We had working capital of$32.1 million atJune 30, 2022 compared to$44.8 million atDecember 31, 2021 . We generated cash flows from operating activities of$13.2 million during the first six months of 2022 compared to cash flows provided by operating activities of$12.8 million for the first six months of 2021. The increase in cash flows from operating activities was primarily driven by higher sales margins partially offset by higher costs of rentals during the first six months of 2022.
Strategy
For the remainder of 2022, our overall plan is to continue monitoring and
holding expenses in line with the anticipated level of activity, fabricate
rental fleet equipment only in direct response to market requirements, emphasize
marketing of our idle gas compressor units and limit bank borrowing in line with
market conditions. For the remainder of 2022, our forecasted capital
expenditures are not anticipated to exceed our internally generated cash flows,
cash on hand and borrowing availability under our New Credit Agreement. The
majority of required capital will be for contracted, premium-priced additions to
our compressor rental fleet and/or required service vehicles. We believe that
cash flows from operations, our current cash position and borrowing capacity
under our New Credit Agreement will be sufficient to satisfy our capital and
liquidity requirements for the foreseeable future.
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--------------------------------------------------------------------------------Bank Borrowings
The New Credit Agreement withTexas Capital Bank, National Association (the "Lender") has an initial commitment of$20 million , and an accordion feature that would increase the maximum commitment to$30 million , subject to collateral availability. We also have a right to request from the Lender, on an uncommitted basis, an increase of up to$30 million on the aggregate commitment; provided however, the aggregate commitment amount is not permitted to exceed$50 million . The maturity date of the New Credit Agreement isMay 11, 2026 . As ofJune 30, 2022 , we did not have any borrowings outstanding under the New Credit Agreement.
Critical Accounting Policies and Practices
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States . In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted inthe United States . Actual results could differ significantly from those estimates under different assumptions and conditions. Management has determined that our critical accounting policies are those that relate to revenue recognition, estimating the allowance for doubtful accounts, accounting for income taxes, accounting for long-lived assets and accounting for inventory.
There have been no changes in the critical accounting policies disclosed in the
Company's Form 10-K for the year ended
Recently Issued Accounting Pronouncements
Please read Note 2, Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements in our condensed consolidated financial statements in this report.
Off-Balance Sheet Arrangements
From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As ofJune 30, 2022 , the off-balance sheet arrangements and transactions that we have entered into include purchase agreements. We do not believe that these arrangements are reasonably likely to materially affect our liquidity or availability of capital resources.
Special Note Regarding Forward-Looking Statements
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 endedDecember 31, 2021 filed with theSEC .
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