Business context and reporting period
Natural Gas Services Group, Inc. (NYSE: NGS) filed this Form 10-K for the fiscal year ended December 31, 2021; it is an annual report, not a standalone fourth-quarter filing. The company manufactures, fabricates, rents, sells, and services natural-gas compressors and flare systems, with rental compression as its primary business. The Permian Basin generated approximately 51.8% of 2021 rental revenue.
Financial and operating performance
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $72.4 million | $68.1 million |
| Operating loss | $12.4 million | $3.6 million |
| Net income (loss) | $(9.2) million | $1.8 million |
| Diluted earnings (loss) per share | $(0.70) | $0.14 |
| Operating cash flow | $28.5 million | $32.6 million |
| Capital expenditures | $25.7 million | $15.3 million |
| Adjusted EBITDA (non-GAAP) | $18.7 million | $24.9 million |
| Adjusted gross margin (non-GAAP) | $27.1 million; 37.4% | $32.6 million; 47.9% |
Rental revenue rose 4.6% to $63.6 million; sales revenue rose 21.7% to $6.9 million, primarily on higher parts sales, while service and maintenance revenue increased to $1.9 million. GAAP gross margin was $2.3 million versus $8.0 million. Rental fleet utilization improved to 62.0% by unit count and 71.2% by horsepower, from 57.3% and 65.6%, respectively, despite a smaller fleet. At year-end, 1,254 compressors totaling 297,808 horsepower were rented to 83 customers.
Liquidity, debt, and material changes
Year-end cash and cash equivalents were $22.9 million, down from $28.9 million. Current assets were $65.1 million and current liabilities $20.3 million, producing working capital of $44.8 million, compared with $61.9 million in 2020. The company reported no borrowings under its new revolving credit facility at year-end; the borrowing base was $20.0 million, and the company was in compliance with financial covenants. The five-year facility, entered into in May 2021, has an initial $20 million commitment and matures May 11, 2026.
Operating cash flow funded most of the $25.7 million in capital expenditures. The company also spent $7.9 million repurchasing shares. Stockholders’ equity was $235.9 million. The current ratio and other liquidity ratios are not stated in the filing text.
Revenue growth did not translate into profitability. Rental costs increased 28.5% to $36.6 million, driven by elevated fleet repairs and maintenance and higher initial costs for newly installed units. The company also recorded a $3.1 million loss retiring 263 rental units, compared with $0.3 million for 216 units in 2020. Inventory allowance expense was $0.2 million. Depreciation and amortization was $25.4 million, broadly flat year over year.
Outlook, commentary, and risks
Management expected demand for medium- and large-horsepower rental units to remain strong for the rest of 2022 as oil prices recovered. It expected minimal compressor sales, citing customers’ preference to rent and capital-budget priorities. Planned 2022 capital expenditures were to depend on customer requirements and were not expected to exceed internally generated cash flows; management said cash, operating cash flow, and credit availability should cover planned needs. These are forward-looking expectations, not guarantees.
- Supply-chain disruptions were causing longer component lead times and higher costs; pricing pressure could limit the company’s ability to pass costs on to customers.
- Occidental Permian, Ltd. (Oxy) accounted for 40% of 2021 revenue and 46% of year-end receivables, up from 30% and 35%, respectively, in 2020. Loss of, or collection problems with, this customer could materially affect results and cash flow.
- Oil-and-gas industry cyclicality, commodity-price volatility, customer spending, competition, and short-term or month-to-month rental arrangements expose utilization and pricing to rapid changes.
- Environmental, emissions, climate-policy, and potential restrictions on federal leasing or hydraulic fracturing could affect customers’ activity and demand. The company said it was not aware of current cleanup orders and did not expect near-term material environmental compliance spending, but future costs and liabilities remain uncertain.
- Management considered ordinary-course legal matters not likely to have a material effect and reported no material off-balance-sheet arrangements. The auditor reported no critical audit matters; management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether higher rental utilization and demand can offset elevated repair, maintenance, and new-unit costs—and restore margins.
- Oxy’s continuing share of revenue and receivables, payment performance, and the company’s ability to diversify its customer base.
- Actual 2022 rental demand, compressor sales, capital spending, and supply-chain cost and delivery trends versus management’s expectations.
- Cash generation after capital expenditures and repurchases, available borrowing-base capacity, and compliance with credit-agreement covenants.
- The sustainability of reported non-GAAP adjusted EBITDA and adjusted gross margin; these exclude items including depreciation, and adjusted EBITDA also excludes specified costs such as equipment retirements and inventory allowances.