Business context and reporting period
Natural Gas Services Group, Inc. (NYSE: NGS) filed this Form 10-K for the fiscal year ended December 31, 2023. It rents, operates, maintains, designs, fabricates and sells natural-gas compression equipment, with rental compression as its principal business. The comparison below is for full-year 2023 versus full-year 2022, not a standalone fourth quarter.
The Permian Basin generated approximately 63.6% of 2023 rental revenue. Occidental Permian, Ltd. (Oxy) accounted for 50% of revenue and 64% of year-end accounts receivable, up from 42% and 55%, respectively, in 2022.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue | $121.2 million | $84.8 million |
| Operating income | $10.5 million | $0.4 million |
| Net income (loss) | $4.7 million | ($0.6 million) |
| Diluted earnings (loss) per share | $0.38 | ($0.05) |
| Adjusted EBITDA (non-GAAP) | $45.8 million | $29.2 million |
| Cash flow from operations | $18.0 million | $27.8 million |
| Capital expenditures | $153.9 million | $65.1 million |
Revenue rose 42.8%. Rental revenue increased 42.6% to $106.2 million, sales revenue increased 4.1% to $8.9 million, and aftermarket services revenue rose to $6.1 million from $1.8 million. Rental growth reflected more rented large-horsepower units and higher rates.
GAAP gross margin was $32.9 million, compared with $14.9 million. Adjusted gross margin, a non-GAAP measure excluding depreciation and amortization, was $58.7 million (48.5% of revenue), versus $38.5 million (45.3%). Rental adjusted gross margin improved to 54.0% from 49.3%; sales adjusted gross margin fell to approximately zero from 10.7%, and service and maintenance margin declined to 23.5% from 46.6%.
Year-end cash was $2.7 million. Current assets were $76.3 million and current liabilities $32.7 million, producing reported working capital of $43.6 million, versus $23.7 million in 2022. Operating cash flow declined principally amid a $25.0 million increase in trade receivables, which management attributed partly to billing and collection delays accompanying higher rental activity; management expected a reversal in 2024.
Capital spending of $153.9 million substantially exceeded operating cash flow and was funded with operating cash and revolving-credit borrowings. Credit-facility debt increased to $164.0 million from $25.0 million; the year-end weighted average interest rate was 9.40%. The $225 million commitment was subject to borrowing-base limits, with approximately $55.7 million of availability reported. The company was in compliance with financial covenants at year-end. Total assets were $478.7 million, total liabilities $242.8 million, and stockholders’ equity $235.9 million.
Material changes versus 2022
- Rented horsepower increased to 420,432 from 318,350; horsepower utilization rose to 80.8% from 74.8%. Unit utilization improved to 66.5% from 65.3%.
- Rental equipment and property investment rose to $153.9 million from $65.1 million, alongside the substantial increase in revolving debt.
- Interest expense increased to $4.1 million from $0.4 million. Interest paid was $7.1 million in 2023 versus $0.3 million in 2022.
- The company recorded a $4.0 million inventory-obsolescence allowance, primarily associated with ending new-unit fabrication at its Midland facility, and a $0.8 million impairment expense and $0.5 million loss on rental-equipment retirements.
- Aftermarket services revenue increased sharply, but included higher lower-margin pass-through costs related to compressor sets.
Outlook, risks and unusual items
Management viewed the oil-market outlook as favorable and expected demand for the existing fleet to remain positive if oil prices stayed within reasonable ranges. It described natural-gas market conditions as weaker because of depressed prices, while noting potential opportunities for small- and medium-horsepower units. 2024 capital expenditures are to depend on customer requirements, capital availability and prudent use of leverage. Management believed cash, operating cash flow and credit availability would be sufficient for planned 2024 needs; the filing gives no specific 2024 revenue or earnings guidance.
The company is shifting most Midland new-unit fabrication to third-party providers, while retaining Tulsa fabrication capability and Midland maintenance, make-ready and rebuild work. Management cited cost, production efficiency, quality and labor considerations. Supplier lead times and parts availability, inflation, and the ability to pass costs to customers remain risks.
Key risks include oil and gas price and activity cyclicality; short-term or month-to-month rental arrangements; heavy Oxy customer concentration; variable-rate debt, covenant and borrowing-base constraints; substantial fleet investment needs; and environmental, emissions and regulatory changes that could affect customers’ activity or demand. Of 1,247 rented compressors, 773 were month-to-month at year-end.
Internal control over financial reporting and disclosure controls were reported ineffective at December 31, 2023 because an inventory-process material weakness remained unremediated, involving physical counts and review and approval of inventory adjustments. Management reported remediation efforts underway, with further work and testing planned for 2024. The independent auditor gave an unqualified opinion on the financial statements and reported no critical audit matters; it did not provide an opinion on internal-control effectiveness.
Other notable matters: the company had an $11.5 million federal income-tax receivable, and the IRS selected certain 2015, 2016, 2017 and 2019 returns for examination. Ordinary-course legal proceedings were not expected by management to have a material effect. The company reported no material cybersecurity incidents and no material off-balance-sheet arrangements. It does not anticipate paying a cash dividend.
Important facts for investors to verify
- Oxy’s continuing contribution to revenue and receivables, customer retention, and the company’s ability to diversify its customer base.
- Receivables collection and working-capital normalization, given lower operating cash flow and the large receivables increase.
- Actual borrowing availability under the borrowing base, future interest costs, covenant headroom and financing needs as fleet investment continues.
- Whether utilization, rental rates and returns on the expanded large-horsepower fleet support the associated capital spending and debt.
- Progress in remediating the inventory-control material weakness and the effect of the Midland fabrication transition on costs, inventory and delivery capacity.
- Outcome of the IRS examination and recoverability and timing of the $11.5 million tax receivable.