Natural Gas Services Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company manufactures, rents, sells and services natural gas compressors and flare systems, primarily for oil and gas producers. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $17.4 | $19.9 | $35.3 | $37.9 |
| Operating income (loss) | ($0.1) | $0.3 | ($0.4) | $0.2 |
| Net income | $0.2 | $0.3 | $4.2 | $0.4 |
| Diluted EPS | $0.01 | $0.02 | $0.32 | $0.03 |
| Operating cash flow | Not presented separately | Not presented separately | $14.8 | $6.8 |
- Q2 revenue fell 12.5% year over year: rental revenue rose 11.5% to $15.1 million, but sales dropped 65.5% to $2.0 million. Service and maintenance revenue declined to $0.3 million.
- For the first half, revenue declined 6.8%; rental revenue grew 15.8% to $31.2 million, while sales fell 65.2% to $3.5 million. Lower compressor sales were the main sales driver.
- Operating results weakened as lower sales and higher depreciation outweighed rental growth. Depreciation and amortization increased 10.2% in Q2 and 11.0% for the first half, reflecting larger horsepower equipment additions.
- First-half net income includes a substantial tax benefit related to CARES Act NOL carrybacks. The company recorded a $4.9 million current tax benefit, a $15.0 million federal income tax receivable and a $10.1 million increase in deferred tax liabilities. Thus, reported net income does not reflect operating profitability alone.
Liquidity, cash flow and debt
- At June 30, cash was $15.5 million, working capital was $54.2 million and total current assets were $58.6 million versus current liabilities of $4.5 million.
- First-half operating cash flow of $14.8 million exceeded $11.0 million of capital expenditures. Cash increased by $3.9 million from year-end 2019.
- Debt outstanding was $0.4 million under a $30 million secured revolving facility; reported borrowing-base availability was $29.5 million. The facility matures December 31, 2020. The company reported compliance with financial covenants at quarter-end.
- The company borrowed $4.6 million through the Paycheck Protection Program in April and voluntarily repaid the loan, with accrued interest, on May 4, 2020.
Material changes, outlook and risks
- COVID-19, the oil-demand shock and low prices led to customer shut-ins, equipment returns and reduced drilling and completion activity. Rental revenue, unit utilization and horsepower utilization declined 6.0%, 5.2% and 4.5%, respectively, in Q2 versus Q1 2020. Management said utilization was steady in July versus June and pricing had stabilized.
- At June 30, 2020, 1,273 compressors totaling 284,373 horsepower were rented to 84 customers. Unit utilization was 54.5% and horsepower utilization 63.6%, compared with 53.4% and 59.9% a year earlier. The fleet had 2,335 packages and 446,805 total horsepower.
- Management expected compressor sales to remain low for the rest of 2020. It budgeted $19–$21 million in 2020 capital expenditures, including $11.0 million spent in the first half and a planned additional $8–$10 million. Spending was to focus on contracted, premium-priced fleet additions and service vehicles. Cost measures included headcount reductions, wage freezes and tighter expense controls.
- Management said it could not estimate the pandemic’s full effects on results, liquidity or financial condition for the rest of 2020 or 2021. Further COVID-19 restrictions, changes in oil supply and demand, and commodity-price weakness could pressure utilization and rental revenue. The company reported no pandemic-related supply-chain disruption to date.
- The company recorded no rental-equipment impairment at June 30. It reported no material legal proceedings or known threatened material litigation.
Accounting and controls
- The company revised 2019 comparative results for previously capitalized operating costs. Revised first-half 2019 net income was $0.4 million, versus $0.9 million as originally reported; operating income was revised to $0.2 million from $0.8 million.
- Disclosure controls were reported ineffective because of unremediated material weaknesses involving income-tax accounting and capitalization of compressor make-ready and maintenance costs. Management expected to remediate the tax-control weakness by year-end 2020. The filing also says headquarters closure and staffing challenges delayed interim financial-data collection.
Important facts for investors to verify
- Whether the $15.0 million CARES Act tax receivable is collected as expected, and how the tax benefit affects future-period comparisons.
- Whether rental utilization, pricing and customer activity recover or deteriorate, particularly if oil prices or pandemic conditions worsen.
- Whether low compressor sales and higher depreciation continue to weigh on operating results, and whether planned capital spending remains within the $19–$21 million budget.
- Whether the revolving credit facility is renewed or refinanced before its December 31, 2020 maturity, and whether covenant compliance and borrowing availability are maintained.
- Progress in remediating the disclosed material weaknesses and preventing further accounting revisions.