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, 2020 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, 2020 , 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 ofMarch 31, 2021 , we had 1,265 natural gas compressors totaling 287,914 horsepower rented to 80 customers compared to 1,383 natural gas compressors totaling 298,143 horsepower rented to 92 customers atMarch 31, 2020 . 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 compressors packages are acquired through periodic purchase orders placed with third-party suppliers on an "as needed" basis, which presently require lead times between two to three 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. In the past, we have not experienced any sudden and dramatic increases in the prices of the major components for our compressors; however, the occurrence of such an event 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 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.
13
--------------------------------------------------------------------------------
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 1,380 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.
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. Activity levels of exploration
and production companies have been and will be dependent not only on commodity
prices, but also on their ability to generate sufficient operational cash flow
to fund their activities. Generally, though, we feel that production activities
(in which we are involved) will fare better than drilling activity.
Recent Events
OnJanuary 30, 2020 , theWorld Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus known as COVID-19 due to the risks it imposes on the international community as the virus spreads globally. InMarch 2020 , theWHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The effects of the COVID-19 outbreak, including actions taken by businesses and governments to contain the spread of the virus, resulted in a significant, rapid decline in global andU.S. economic conditions. This significant drop in economic activity caused global demand for crude oil to drastically decline.
Given the current economic and industry backdrop, we still expect compressor sales to be low for the remainder of 2021, as exploration and production companies have significantly reduced their capital expenditures budgets.
In regards to our costs, we implemented various cost cutting measures with respect to operating expenses and capital expenditures during the second quarter of 2020. Our operating expense reductions included reductions in our headcount from both layoffs and attrition, wage freezes, centralization of certain processes for better cost control, and the enlistment of our suppliers in our cost cutting efforts. These cost cutting measures helped our financial performance and liquidity during 2020, and we expect these cost cutting measures to continue to benefit our financial performance through the remainder of 2021. In addition, as we have done during prior downturns, we significantly reduced our capital expenditures budget. Finally, in keeping with current commercial precautions and practices in our industry, we have implemented guidelines to mitigate health risks to our employees and customers during this outbreak. To date, our field operations have continued largely uninterrupted as theU.S. Department of Homeland Security designated our industry as part of our country's critical infrastructure. Remote work and work process adjustments related to COVID-19 have not impacted our ability to maintain our service operations or caused us to incur significant additional costs. In addition, we have not experienced any supply chain issues in connection with the COVID-19 outbreak. 14 --------------------------------------------------------------------------------
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 March 31,
2021 2020
(in thousands)
Rental $ 15,341 83.4 % $ 16,100 90.0 %
Sales 2,711 14.7 % 1,450 8.1 %
Service and Maintenance 345 1.9 % 340 1.9 %
Total $ 18,397 $ 17,890
Total revenue increased 2.8% to $18.4 million for the three months ended March
31, 2021 compared to $17.9 million for the three months ended March 31, 2020 .
This increase was primarily a result of higher sales revenue (87% increase)
during 2021 mainly due to higher compressor sales offset by lower rental revenue
(4.7% decrease).
Rental revenue decreased to $15.3 million for the three months ended March 31,
2021 compared to $16.1 million for the same period in 2020. This decrease during
the first quarter of 2021 was attributable to decline in our rented units due to
a significant drop in oil prices resulting from the COVID-19 pandemic and crude
oil demand reduction.
As of March 31, 2021 , we had 2,238 compressor packages in our fleet, down from
2,316 units at March 31, 2020 due to the retirement of 122 units during the
fourth quarter of 2020. The Company's total unit horsepower increased by 1.0% to
441,911 horsepower at March 31, 2021 compared to 437,750 horsepower at March 31,
2020 , which reflects the addition to the Company's fleet of 18 high horsepower
compressors with 13,880 horsepower over the past 12 months. As of March 31,
2021 , we had 1,265 natural gas compressors with a total of 287,914 horsepower
rented to 80 customers, compared to 1,383 natural gas compressors with a total
of 298,143 horsepower rented to 92 customers as of March 31, 2020 . As a result,
our total rented horsepower as of March 31, 2021 decreased by 3.4% over the
prior twelve months. Our rental fleet had unit utilization as of March 31, 2021 ,
and 2020, respectively, of 56.5% and 59.7%, and our horsepower utilization for
the same periods, respectively, was 65.2% and 68.1%. While both our total rented
horsepower and total rented units declined during the period, our total rented
horsepower only declined by 3.4% contrasted against an 8.5% decline in total
rented units. This illustrates the strong demand for our high horsepower units
while the demand for our smaller and medium horsepower units has decreased with
recent lower commodity prices.
Sales revenue increased to $2.7 million for the three months ended March 31,
2021 compared to $1.5 million for the three months ended March 31, 2020 . This
increase is mostly attributable to increased compressor sales and, to a lesser
extent, increased parts sales during the first quarter of 2021 compared to the
same period in 2020. These increased sales reflect marginally improving industry
activity levels due to recently stabilized commodity prices and easing of
capital constraints on exploration and production companies. 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 decreased to $7.2 million during the three months ended March
31, 2021 compared to $7.9 million during the three months ended March 31, 2020 .
While rental revenues declined 4.7%, this 9.4% decline in costs of rentals is
due to additional cost containment efforts related to the industry downturn.
Cost of sales increased 50.4% to $2.6 million during the three months ended
March 31, 2021 compared to $1.7 million during the three months ended March 31,
2020 . This increase was primarily due to higher compressor sales and, to a
lesser degree, higher parts sales during the period. This increase was partially
offset by lower labor efficiency due to much lower activity levels at our
fabrication facilities partially offset by lower payroll and benefits expenses.
Selling, general, and administrative ("SG&A") expenses increased 22.5% to $2.6
million for the three months ended March 31, 2021 compared $2.2 million during
the same period in 2020. This increase in SG&A expenses was primarily
attributable to an increase in our deferred compensation liability which
resulted in increased SG&A expense. In the first quarter of 2020 we had a
decrease in the liability resulting in a recognized gain, thus reducing our SG&A
expense. These changes
15
--------------------------------------------------------------------------------
increased SG&A by approximately
Depreciation and amortization expense increased marginally to$6.3 million for the three months endedMarch 31, 2021 compared to$6.2 million for the three months endedMarch 31, 2020 . This increase was the result of larger horsepower units being added to the fleet partially offset by unit retirements in the fourth quarter of 2020. We recorded an income tax expense of approximately$125,000 for the three months endedMarch 31, 2021 compared to an income tax benefit of$4.5 million for the three months endedMarch 31, 2020 . 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 with the period endedMarch 31, 2020 being significantly impacted by prior year amended returns related to the CARES Act. Our estimated annual effective tax rate differs from theU.S. federal statutory rate of 21%. 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 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, as a basis
for strategic planning and forecasting, and as a component for setting incentive
compensation.
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.
16
--------------------------------------------------------------------------------Reconciliation
The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to Adjusted EBITDA:
Three months ended March 31,
2021 2020
(in thousands)
Net income (loss) $ (394) $ 4,082
Interest expense 1 3
Income tax expense (benefit) 125 (4,543)
Depreciation and amortization 6,297 6,240
Non-cash stock compensation expense 474 502
Adjusted EBITDA $ 6,503 $ 6,284 For the three months ended
Liquidity and Capital Resources
Our working capital positions as ofMarch 31, 2021 andDecember 31, 2020 are set forth below: March 31, December 31, 2021 2020 (in thousands) Current Assets: Cash and cash equivalents$ 30,683 $ 28,925 Trade accounts receivable, net 12,724 11,884 Inventory 19,982 19,926 Federal income tax receivable 11,538 11,538 Prepaid income taxes 62 66 Prepaid expenses and other 81 379 Total current assets 75,070 72,718 Current Liabilities: Accounts payable 1,181 2,373 Accrued liabilities 10,483 6,770 Line of credit - 417 Current operating leases 169 198 Deferred income 34 1,103 Total current liabilities 11,867 10,861 Total working capital$ 63,203 $ 61,857 For the three months endedMarch 31, 2021 , we invested$5.0 million in rental and property and other equipment. During the first quarter of 2021, we added$4.5 million in new equipment to our rental fleet and$0.5 million 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 decreased by$1.0 million during the three months endedMarch 31, 2021 . We financed our investment in rental equipment, property and other equipment with cash flow from operations and cash on hand. 17 --------------------------------------------------------------------------------
Cash flows
AtMarch 31, 2021 , we had cash and cash equivalents of$30.7 million compared to$28.9 million atDecember 31, 2020 . Our cash flows from operating activities of$7.4 million were partially offset by capital expenditures of$5.0 million during the three months endedMarch 31, 2021 . We had working capital of$63.2 million atMarch 31, 2021 compared to$61.9 million atDecember 31, 2020 . OnDecember 31, 2020 , we had outstanding debt of$417,000 , which was all related to our line of credit. We generated cash flows from operating activities of$7.4 million during the first three months of 2021 compared to cash flows provided by operating activities of$8.3 million for the first three months of 2020. The decline in cash flows from operating activities was primarily driven by lower cash receipts on accounts receivable during the first three months of 2021 as well as higher SG&A expenses. These increases were partially offset by slightly higher rental and sales margins.
Strategy
For the remainder of 2021, given the state of the economy and our industry during the COVID-19 pandemic, our plan is to continue to keep our expenses low. The cost cutting measures that were implemented during the second quarter of 2020 will provide a continuing positive impact over the remainder of this year. For the remainder of 2021, our forecasted capital expenditures are not anticipated to exceed our internally generated cash flows and our cash on hand. Any 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 and our current cash position will be sufficient to satisfy our capital and liquidity requirements for the foreseeable future.
Bank Borrowings
We have a senior secured revolving credit agreement the ("Credit Agreement")
with Texas Capital Bank, National Association . (the "Lender") with 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 Credit Agreement is May 11, 2026 . For further information, see Part II Item
5 - Other Information.
Critical Accounting Policies and Practices
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 ofMarch 31, 2021 , the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and 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
18
--------------------------------------------------------------------------------
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
© Edgar Online, source
