Business context and reporting period
Natural Gas Services Group, Inc. (NYSE: NGS) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company manufactures, rents, sells, and services natural-gas compression equipment and flare systems; rental is its primary business. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $17.75 | $17.41 | $36.15 | $35.30 |
| Operating income (loss) | $(2.29) | $(0.15) | $(2.66) | $(0.42) |
| Net income (loss) | $(1.92) | $0.17 | $(2.31) | $4.25 |
| Adjusted EBITDA (non-GAAP) | $4.51 | $7.09 | $11.01 | $13.38 |
- Q2 revenue mix: Rental revenue was $15.61 million, sales $1.57 million, and service and maintenance $0.56 million. Rental revenue represented 88% of total revenue.
- Costs and profitability: Q2 cost of rentals increased 37% to $9.08 million, mainly from fleet repair and maintenance work and higher initial costs on newly placed units. The company reported Q2 operating loss of $2.29 million and diluted loss per share of $0.14. Six-month diluted loss per share was $0.17.
- Cash flow and investment: Six-month operating cash flow was $12.75 million, compared with $14.80 million a year earlier. Investing cash outflow was $12.62 million, including purchases of rental and other equipment. Cash declined to $26.17 million from $28.93 million at year-end 2020.
- Liquidity and debt: Working capital was $57.86 million, down from $61.86 million at December 31, 2020. The company had no borrowings under its new revolving credit facility at June 30; the prior $0.42 million line-of-credit balance had been repaid. The new facility has a $20 million initial commitment, with an accordion subject to conditions, and matures May 11, 2026. The company reported compliance with its financial covenants.
- Balance sheet: Total assets were $306.60 million and stockholders’ equity was $247.90 million. The $11.54 million federal income tax receivable relates to NOL carrybacks under the CARES Act.
Material changes versus the prior comparable period
- Q2 revenue rose 2.0%, as rental revenue grew 3.2% and service revenue increased, partly offset by a 22% decline in sales. For the first six months, revenue rose 2.4%; sales increased, mainly on parts, while rental revenue declined 0.9%.
- Q2 net results swung to a loss from modest income. For the six-month comparison, 2020 net income included a $4.49 million income tax benefit, significantly affected by CARES Act-related amended returns; the 2021 tax benefit was $0.21 million.
- Adjusted EBITDA declined 36.5% in Q2 and 17.7% in the first half. Management attributed the declines mainly to higher rental costs, with higher cash SG&A also affecting the six-month result.
- At June 30, 2021, 1,245 compressors totaling 287,365 horsepower were rented to 79 customers, compared with 1,273 compressors, 284,373 horsepower, and 84 customers a year earlier. Horsepower utilization improved to 64.3% from 63.6%; unit utilization rose to 55.2% from 54.5%.
- The company repurchased 175,007 shares for $1.9 million during the first half at an average $10.81 per share. Approximately $7.6 million remained under its authorization at June 30, 2021.
Outlook, commentary, and risks
- Management expected compressor sales to remain low through the rest of 2021 because of reduced E&P capital budgets. It planned to continue managing operating costs and capital spending; forecast capital expenditures were not expected to exceed internally generated cash flow and cash on hand. Planned capital needs were primarily contracted, premium-priced fleet additions and service vehicles.
- Management said operating cash flow and cash on hand should be sufficient for capital and liquidity needs for the foreseeable future. This is a forward-looking statement, not a quantified earnings or revenue forecast.
- Management described rental demand as comparatively stable, while sales can fluctuate with customer capital projects and drilling activity. Commodity-price declines, constrained customer spending, and industry cyclicality remain material risks. Component cost increases, competition, and new safety, health, or environmental rules could also adversely affect results.
- Management reported no COVID-related supply-chain issues or significant added costs to date, and said field operations continued largely uninterrupted. Results for the interim period are not necessarily indicative of full-year results.
- No material legal proceedings or threatened material litigation were reported. The filing says there were no material changes to previously disclosed market risks; see the 2020 Form 10-K for the broader risk discussion.
Important facts for investors to verify
- Whether the increase in fleet repair and maintenance costs persists, and whether it continues to pressure rental profitability and cash generation.
- Trends in compressor sales, rental rates, utilization, and demand for larger-horsepower units as commodity prices and customer spending change.
- Actual capital expenditures versus management’s expectation that spending remain within internally generated cash flow and cash on hand.
- Collection and timing of the $11.54 million federal tax receivable, and the effect of tax benefits on reported earnings.
- Share repurchases, remaining authorization, and the effect of repurchases on liquidity and capital available for operations.
- Borrowing-base availability, collateral and covenant requirements under the new credit facility; the commitment is subject to availability and other conditions.