Natural Gas Services Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; compared with the three months ended March 31, 2023. The company rents, services, maintains, sells, and fabricates natural gas compression equipment, with rental compression as its primary business.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change / context |
|---|---|---|---|
| Total revenue | $36.9 million | $26.6 million | Up 38.6% |
| Rental revenue | $33.7 million | $22.7 million | Up 48.5%, driven by high-horsepower rentals and rate increases |
| Sales revenue | $2.5 million | $3.0 million | Down 16.3% |
| Aftermarket services revenue | $0.7 million | $0.9 million | Down 26.0% |
| Operating income | $9.3 million | $0.4 million | Operating margin approximately 25.3%, versus 1.5% |
| Net income / diluted EPS | $5.1 million / $0.41 | $0.4 million / $0.03 | Net margin approximately 13.8%, versus 1.4% |
| Adjusted EBITDA (non-GAAP) | $16.9 million | $7.8 million | Up 116.8%; approximately 45.7% of revenue |
| Net cash from operating activities | $5.6 million | $18.2 million | Lower year over year |
Rental costs increased 12.6% to $13.1 million as rented horsepower grew. Depreciation and amortization rose to $7.1 million from $6.2 million, mainly due to high-horsepower fleet additions. Interest expense was $2.9 million; cash interest paid was $6.2 million. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Financial position and liquidity
- At March 31, 2024, cash was $5.2 million, total assets $486.2 million, and working capital $54.4 million, up from $43.6 million at year-end 2023. Current liabilities were $24.4 million, down from $32.7 million.
- Long-term debt was $172.0 million, up $8.0 million from December 31, 2023. The weighted-average interest rate was 8.93%. The company reported $46.1 million of additional borrowing availability, subject to borrowing-base determination, and compliance with its financial covenants.
- Investing cash outflow was $10.9 million, primarily for rental and other equipment; operating cash flow and $8.0 million of new borrowings helped fund investment. Cash increased by $2.5 million during the quarter.
- The $11.5 million federal income tax receivable relates to prior-year net operating loss carrybacks and was unchanged from year-end.
Material changes and business developments
- The company had 1,245 compressors rented to 80 customers at quarter-end, with 444,220 rented horsepower, up 32.5% year over year. Horsepower utilization increased to 81.9% from 77.4%, while unit utilization decreased to 65.7% from 66.4%.
- Total fleet size was 1,894 packages, and total fleet horsepower was 542,256. Management attributed rental growth to the deployment of high-horsepower units and pricing increases.
- In December 2023, the company ceased fabricating new compressor units at its Midland facility; it retained fabrication capability in Tulsa and uses outside fabrication providers. Management is prioritizing rentals as customers favor renting over purchasing new units.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management expects operating cash flow and available revolver capacity to support planned capital expenditures through 2024, while capital spending will depend on customer requirements and capital availability.
- Management cites oil and gas prices and production activity, customer capital spending, competition, inflation and parts availability, and the ability to raise rental rates as important business risks. Compressor sales are expected to remain low for the foreseeable future.
- A material weakness in internal control over financial reporting remains outstanding, relating to physical inventory counts and review and approval of inventory adjustments. Management says remediation efforts are underway; it concluded the financial statements are fairly presented after additional analyses and procedures.
- The company recorded a rental-equipment impairment of less than $0.1 million. It reported no material legal proceedings and no subsequent event requiring disclosure.
Important facts for investors to verify
- Whether high-horsepower demand, rental rates, and utilization can sustain rental growth and profitability.
- Whether capital spending and working-capital needs can be funded while managing $172.0 million of debt, interest costs, and borrowing-base limitations.
- Progress and independent validation of remediation of the inventory-related material weakness.
- Exposure to commodity-driven customer activity, supplier cost increases, component availability, and the planned reduction in new-unit fabrication for sale.