Natural Gas Services Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. NGS manufactures, rents, sells and services natural gas compression equipment and flare systems, with rental operations as its primary business.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $20.7 million | $18.2 million | $61.0 million | $54.4 million |
| Operating income (loss) | ($1.5 million) | ($1.6 million) | ($0.5 million) | ($4.2 million) |
| Net income (loss) | ($0.08 million) | ($1.3 million) | $0.2 million | ($3.6 million) |
| Adjusted EBITDA, non-GAAP | $7.7 million | $5.4 million | $21.4 million | $16.4 million |
- Revenue grew 13.7% in Q3 and 12.2% for the first nine months, principally from rental growth. Rental revenue was $18.6 million in Q3 (+15.0%) and $53.9 million year to date (+14.3%).
- Operating margins were approximately (7.2%) in Q3 and (0.8%) for the nine months, compared with approximately (8.6%) and (7.8%) in 2021. Rental cost inflation and higher SG&A continued to weigh on operating results.
- Operating cash flow was $18.9 million for the nine months, versus $20.0 million a year earlier. Investing cash outflow was $34.1 million, including $35.3 million of equipment and property purchases; financing cash outflow was $5.2 million.
- Cash fell to $2.6 million from $22.9 million at December 31, 2021. Working capital was $24.2 million, down from $44.8 million. Current assets were $49.8 million and current liabilities $25.6 million; current assets include an $11.5 million federal tax receivable.
- Long-term debt was $2.0 million, drawn under a revolving facility. The company reported an $18.0 million allowable borrowing base and compliance with all financial covenants. The facility matures in May 2026.
- Total assets were $300.1 million and stockholders’ equity was $230.3 million at September 30, 2022. No rental-equipment impairment was identified.
Material changes and unusual items
- Rented horsepower rose 6.0% year over year, while rented compressor units declined 2.0%. Horsepower utilization increased to 72.2% from 63.8%, and unit utilization rose to 60.5% from 53.7%, reflecting stronger demand for larger units. The fleet comprised 1,976 packages and 423,658 horsepower.
- Q3 sales increased 21.3%, mainly from parts; nine-month sales increased modestly, with compressor sales growth partly offset by lower parts sales. Service and maintenance revenue declined 43.6% in Q3 and 24.0% year to date.
- Q3 SG&A included $1.0 million of severance related to former CEO Stephen Taylor’s retirement agreement. The company reported $1.3 million of severance expense for the quarter and $1.4 million year to date.
- Other income included a $1.4 million gain on sale of compression equipment from the rental fleet. Adjusted EBITDA also adds back severance and non-cash stock compensation; it is a company-defined non-GAAP measure and should not be treated as cash flow or a substitute for GAAP earnings.
- Treasury-share purchases totaled $6.7 million for the nine months. Share repurchases and capital investment contributed to the substantial decline in cash.
Outlook, commentary and risks
- Management expected compressor sales to remain low for the rest of 2022 as customers favored rentals over equipment purchases. For the remainder of 2022, it planned to control expenses, build rental equipment in response to market needs, market idle units and limit borrowing. Forecast capital spending was expected to be covered by operating cash flow, cash and available borrowing capacity.
- Management cited significant expected demand growth for large-horsepower compression in 2023 and beyond. Meeting that demand may require an expansion of borrowing capacity; any expansion is not assured. It also planned conversion of up to 100 compressor packages to electric motors, subject to market and infrastructure conditions.
- Inflation has raised equipment-component, labor and parts costs, and suppliers’ lead times were longer than normal. Management said it had so far increased rental rates and sales prices proportionally, but inability to continue doing so could adversely affect results.
- Results remain exposed to oil and gas activity, commodity prices, customer capital-spending constraints, competition, changing technology and potential new safety, health and environmental regulations. The industry is cyclical, and management noted that high commodity prices have not necessarily translated into historical levels of customer capital spending.
- The filing reported no material legal proceedings and no material subsequent event requiring adjustment. After quarter-end, on November 11, 2022, Interim CEO John Chisholm resigned and Stephen Taylor was appointed interim CEO and president while the board searched for a permanent CEO.
Important facts for investors to verify
- Whether rental utilization and high-horsepower demand continue to improve, and whether rental-rate increases keep pace with operating-cost inflation.
- Whether cash generation and the borrowing facility can fund planned fleet investment, particularly if demand requires additional capacity in 2023 and beyond.
- The sustainability of reported earnings and Adjusted EBITDA, including the effects of the equipment-sale gain and CEO-related severance.
- Collection timing for the $11.5 million federal income tax receivable and its effect on liquidity.
- Progress in the permanent CEO search, supplier lead times, and execution of planned electric-motor conversions.